Article written by Boris Bozic
If you’re in the mortgage industry and you’re not aware of the announcement made by the Ministry of Finance and OSFI last week, welcome back from the other planet you were visiting. If you’re spaceship was delayed in getting back to mother earth, here’s what you missed. Mortgages bad, government very wise. We’re all aware of the changes, amortization period reduced, LTV for refinances was cutback, and GDS and TDS was adjusted as well. And if you can afford a home over one million dollars, who cares about you. All very straightforward and in it of itself not devastating to the housing and mortgage sector. But we cannot look at these changes in isolation. It’s the cumulative effect of all the changes that have taken place in the last three years which gives us reason for pause and be concerned.
We have every right to be concerned because this industry is our livelihood. Unlike “elected” political officials and government “employees” this industry is more to us than a theoretical exercise. As an industry we have a responsibility to support efforts as it relates to the long term viability of the housing sector. Anyone, with a modicum of common sense, understands the concept of short term pain for long term gain. However, stakeholders have every right to call out decision makers if there’s concerns that the decisions made today may have unintended consequences. We also have every right to ask decision makers to articulate, in a clear and cogent fashion, the rationale behind the decisions they made.
When clarity is missing you’re left to your own interpretations and code breaking ability. From my viewpoint these changes mean that interest rates will remain at historical lows for an extended period of time. Given what the US Fed said recently, unemployment rate will be higher than 8% and slow growth until Q4 of 2014, interest rates are not going up anytime soon. The changes also suggest that government is guessing how Canada will fare within the global economic reality. It was three months ago that Fed’s said no further changes to mortgage rules was necessary. So what happened in the last ninety days? Nothing in Canada, but in Europe, the US and China, a whole lot happened. That’s our new reality, Europe, the US and China sneezes, Canada grabs a tissue and wipes its nose.
There’s a risk with every move the government makes. It’s clear that the government cannot slow down the housing market through monetary policy so they’ll attempt to do so through regulations. If the government is too “successful” in slowing down the market which leads to job loss and erosion of wealth, well, home owners will look for someone to blame. It’s one thing for voters to believe that we all fell off the real estate cliff together due to a natural real estate cycle. It’s altogether different when the home owner can say, “we were pushed off the cliff”.
Until next time
Cheers
Thursday, 28 June 2012
Wednesday, 27 June 2012
‘’Vancouver eyes new housing body to end ‘affordability crisis’
Frances Bula
Vancouver — The Globe and Mail
Vancouver is hoping to make a dent in the demand for housing from less-wealthy residents by creating a housing-development agency, the way the city’s two universities and the ski resort of Whistler have.
A task force on affordable housing recommended that the city set up a separate agency that could negotiate with private developers on deals to build units on discounted city land. The rents would have to be guaranteed at lower rates than usual for new units.
As well, the agency would then manage the hoped-for thousands of units created to ensure they go to people with lower incomes.
But Vancouver is willing to take on that more aggressive role because the city is “in an affordability crisis,” said Mayor Gregor Robertson, the political leader of a city where the average sale price for a house is around $800,000, more than 10 times median income.
“The city hasn’t had a big focus on stimulating the development of affordable housing historically,” the mayor said, as he announced the task-force recommendations.
He didn’t have any numbers on the cost of setting up a housing authority or on the value of city land that Vancouver might commit to future housing projects.
The recommendations also included creating new “transition zones” that would be geared to different forms of housing than the towers and single-family homes that dominate in Vancouver. There was also a requirement for developers to include more affordable options in major projects.
A housing authority would create a specialized team operating at arm’s length from the city and able to move more quickly to take advantage of real-estate trends and opportunities.
Both the University of B.C. and Simon Fraser University have, through their property-development divisions, focused on creating new models of affordable housing.
Vancouver deputy city manager David McLellan said the city agency would be most like the UBC Properties Trust, which set a goal of building 20-per-cent rental among the new housing developed on its extensive holdings.
“We put the land in and that makes it possible for our rental units to operate on a cost-recovery basis,” said Paul Young, the trust’s development director. The university has created 380 apartments that rent for less than the usual market rates, which go to faculty and students only, and another 375 that are rented at standard rates to anyone.
Whistler started its housing authority in 1977 as, like many high-end ski towns, it discovered that its local residents, essential for the resort’s service businesses, were being priced out of the market. It now manages almost 2,000 rental and home-ownership units.
Oliver Clegg, a 31-year-old who has worked as a hotel and golf course employee and in property management, just bought a three-bedroom townhouse in the resort as a result of the program.
“It’s the best thing I’ve ever done,” said Mr. Clegg, who had to agree to Whistler’s rules that homebuyers can only get a limited amount of profit out of their homes, pegged to the rate of inflation.
The creation of a city agency to develop lower-cost housing is also similar to what Toronto has done – once in the late 90s and again more recently – after federal and provincial funding evaporated, said Mark Guslits, a former chief development officer with the Toronto Community Housing Corporation. Mr. Guslits was a member of Vancouver’s housing task force. (TCHC’s recent woes over managing its older social-housing properties isn’t connected to any of the agency’s housing development work.)
Mr. Guslits said having a separate agency, staffed by people who understand the real-estate market and can negotiate with developers, gives any city its best chance at finding ways of using the private market plus city assets and non-profit agencies to create lower-cost housing.
“When cities have tried to be a developer [without that separate agency], they have either failed or spent far too much money,” said Mr. Guslits.
Many other cities have created housing authorities or corporations to find ways of developing lower-cost housing where the private markets don’t seem to be serving their residents well.
Vancouver — The Globe and Mail
Vancouver is hoping to make a dent in the demand for housing from less-wealthy residents by creating a housing-development agency, the way the city’s two universities and the ski resort of Whistler have.
A task force on affordable housing recommended that the city set up a separate agency that could negotiate with private developers on deals to build units on discounted city land. The rents would have to be guaranteed at lower rates than usual for new units.
As well, the agency would then manage the hoped-for thousands of units created to ensure they go to people with lower incomes.
But Vancouver is willing to take on that more aggressive role because the city is “in an affordability crisis,” said Mayor Gregor Robertson, the political leader of a city where the average sale price for a house is around $800,000, more than 10 times median income.
“The city hasn’t had a big focus on stimulating the development of affordable housing historically,” the mayor said, as he announced the task-force recommendations.
He didn’t have any numbers on the cost of setting up a housing authority or on the value of city land that Vancouver might commit to future housing projects.
The recommendations also included creating new “transition zones” that would be geared to different forms of housing than the towers and single-family homes that dominate in Vancouver. There was also a requirement for developers to include more affordable options in major projects.
A housing authority would create a specialized team operating at arm’s length from the city and able to move more quickly to take advantage of real-estate trends and opportunities.
Both the University of B.C. and Simon Fraser University have, through their property-development divisions, focused on creating new models of affordable housing.
Vancouver deputy city manager David McLellan said the city agency would be most like the UBC Properties Trust, which set a goal of building 20-per-cent rental among the new housing developed on its extensive holdings.
“We put the land in and that makes it possible for our rental units to operate on a cost-recovery basis,” said Paul Young, the trust’s development director. The university has created 380 apartments that rent for less than the usual market rates, which go to faculty and students only, and another 375 that are rented at standard rates to anyone.
Whistler started its housing authority in 1977 as, like many high-end ski towns, it discovered that its local residents, essential for the resort’s service businesses, were being priced out of the market. It now manages almost 2,000 rental and home-ownership units.
Oliver Clegg, a 31-year-old who has worked as a hotel and golf course employee and in property management, just bought a three-bedroom townhouse in the resort as a result of the program.
“It’s the best thing I’ve ever done,” said Mr. Clegg, who had to agree to Whistler’s rules that homebuyers can only get a limited amount of profit out of their homes, pegged to the rate of inflation.
The creation of a city agency to develop lower-cost housing is also similar to what Toronto has done – once in the late 90s and again more recently – after federal and provincial funding evaporated, said Mark Guslits, a former chief development officer with the Toronto Community Housing Corporation. Mr. Guslits was a member of Vancouver’s housing task force. (TCHC’s recent woes over managing its older social-housing properties isn’t connected to any of the agency’s housing development work.)
Mr. Guslits said having a separate agency, staffed by people who understand the real-estate market and can negotiate with developers, gives any city its best chance at finding ways of using the private market plus city assets and non-profit agencies to create lower-cost housing.
“When cities have tried to be a developer [without that separate agency], they have either failed or spent far too much money,” said Mr. Guslits.
Many other cities have created housing authorities or corporations to find ways of developing lower-cost housing where the private markets don’t seem to be serving their residents well.
Tuesday, 26 June 2012
20 Observations on the New Mortgage Rules
Robert McLister, CMT
Three months ago, Finance Minister Jim Flaherty told banks to tighten lending on their own. Now he’s doing it for them.
The Department of Finance (DoF), in concert with OSFI, released a buffet of mortgage rules Thursday. By our count, there are eight salient changes that, when combined, will have a measurable impact on housing.
The motivation for these moves is captured in Flaherty's press briefing comment: "I have been listening to the market, and quite frankly I don't like what I hear.” Loose translation: The debt and housing train is in danger of running off the rails.
The DoF's solutions to this problem will influence our market for years to come. Below are 20 musings on the new mortgage rules, sprinkled with a few tips and predictions:
Three months ago, Finance Minister Jim Flaherty told banks to tighten lending on their own. Now he’s doing it for them.
The Department of Finance (DoF), in concert with OSFI, released a buffet of mortgage rules Thursday. By our count, there are eight salient changes that, when combined, will have a measurable impact on housing.
The motivation for these moves is captured in Flaherty's press briefing comment: "I have been listening to the market, and quite frankly I don't like what I hear.” Loose translation: The debt and housing train is in danger of running off the rails.
The DoF's solutions to this problem will influence our market for years to come. Below are 20 musings on the new mortgage rules, sprinkled with a few tips and predictions:
1. Hurried Implementation:
The government knew full well that borrowers would try to front-run these restrictions. So it provided only 18 days lead time until the changes take effect. Most lending execs had no idea that new mortgage insurance rules were imminent. As a result, lenders were not fully prepared.
Because of this, and because banks like to appear prudent to regulators, there's a chance some lenders may implement rules (like the 25-year amortization restriction) before the July 9, 2012 deadline.
2. The Stampede:
Seemingly every mortgage adviser in the country is blasting out emails advising clients about these changes. The sense of urgency will spike mortgage volumes near-term. But high-ratio borrowers who rush to get a 30-year amortization or 85% loan-to-value (LTV) refi should be warned:
If you’re a well-qualified borrower, you’ll be happy to know that you just became more appealing to lenders. These rules will shrink the pool of prime borrowers. As a result, we’ll see bankers and brokers battle harder for your business. That means the rate wars that Flaherty “discourages” will intensify, whether banks publicize it or not.
4. Side-Effects:
Shorter amortizations, higher qualification rates and lower debt ratio limits will restrict buying power. To that, Flaherty says: “Good. I consider that desirable.”
Canada's 9.6 million existing homeowners, however, may not deem it so desirable—not if these actions trigger a bigger or longer-than-normal selloff that jeopardizes their home equity.
Equity is the biggest source of retirement savings for millions of Canadians. For this reason, even Flaherty would admit that these proposals are essentially a calculated gamble.
On the other hand, waiting for the market self-correct has its own risks, namely a much longer economic recovery if the speculative balloon is punctured.
Either way, the market is propelled by payment affordability. Reducing buying power will weigh on prices. Whether other supply/demand factors offset this pressure is unknowable.
The DoF wants Canadians to believe the side-effects won’t be extreme. And, if market reaction is anything like the 2008, 2010, and 2011 mortgage changes, it won't be.
Flaherty states that "less than five per cent of new home purchasers" will be affected by these changes. If he simply means buyers of brand new homes, five per cent equals ~9,600 people a year (based on CAAMP's 2012 housing starts estimates).
If Vegas made an over/under line on that 5% figure, we’d bet the “over.”
In the new-build market, there are 95,000 first-time buyers each year alone. If you include new and resale purchases, there are roughly 261,000 newbie buyers annually. These are people who are disproportionately affected by these changes, albeit a minority of them.
On top of this you have a minimum of five per cent of repeat buyers (20,000+ a year) that will likely be curtailed by the rule changes to amortizations, qualifications rates, stated income, and debt ratios.
5. The Amortization Effect:
Reducing amortizations to 25 years from 30 chops the maximum theoretical mortgage by roughly 9% (versus ~7% when amortizations dropped from 35 to 30 years). That’s equivalent to paying almost 1% more on your mortgage rate.
Put another way, a qualified family earning $75,000, with no debt, will qualify for $49,000 less mortgage by being forced to take a 25-year amortization.
According to CAAMP, 40% of new mortgages last year had amortizations over 25 years. Of all the new rules, this will have “the most direct impact on the Canadian housing market,” states RBC. It “will raise the barrier to entry into Canada’s housing market.” (That is Flaherty's point, of course.)
TD thinks it could take up to a year for changes like this to negatively impact prices. But some expect a more imminent result.
Robert Kavcic of BMO Nesbitt Burns notes: “After the 35-year amortization was eliminated last March…existing home sales fell by more than 3 per cent over the subsequent two months.”
6. Market Stability:
Most industry observers, ourselves included, believe in the merits of shifting some housing risk to the private sector and building savings rates. "Our economy cannot . . . depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” explains BoC chief Mark Carney.
The government adds that these new rules will bring “long-term stability” to Canada’s real estate market. Note: They say “long term” because they know the effects could be adverse in the short term. The DoF calls that risk “manageable,” however.
Home prices, which are already self-correcting in various regions, will see additional pressure as payment affordability drops. (Ironically, a correction in prices would then, in theory, improve affordability.)
Flaherty has “tapped the brakes at precisely the right time,” says BMO CEO Frank Techar. From our viewpoint it's more like stopping short than a little tap.
All one can hope for is that the brakes don’t lock up, with mortgage affordability being so intimately related to home prices.
That’s partly why the Canadian Association of Accredited Mortgage Professionals (CAAMP) feels the government has “overreached” with this latest round of changes. In a statement Thursday it said:
7. So Much for High-Ratio Refis:
Refinances above 80% LTV will soon be a memory at prime lenders. Refinance volumes will then fall off a small cliff. The last time the Ottawa lowered LTVs on refis, insured refinances tumbled 22% (source: CMHC).
The result will be more people being saddled with high interest debt that they can’t refinance. (Insert your favourite home-ATM analogy here.)
We’ll also see home improvement spending slow. The renovation business is a $66 billion industry and $17+ billion a year is financed with mortgages and HELOCs. (Reining in overleveraged and chronic home renovators is healthy. They are a small wedge of the refi pie, however.)
If you own an average priced home, you’ll be able to refinance $18,780 less debt to your mortgage. If your rate on that debt is 19.99%, for example, the 80% LTV refi restriction could cost you an extra $9,000+ in interest (or more if it takes greater than five years to pay off that rolled-in debt).
On the upside, a loan-to-value ≤ 80% would save you $5,587 in default insurance premiums.
Now more than ever, it will pay to have a competant mortgage adviser run the math and compare all your refi options.
8. Non-Prime is Where It’s at:
Alternative lenders like Equitable Trust and Home Trust are lovin’ life. Their target market has just expanded as regulators force banks to turn away more near-prime borrowers.
If alternative lenders can manage defaults through the eventual housing downturn, they’ll profit handsomely from this volume boost. We're talking borrowers who are less rate sensitive (because they have fewer options) and at least three times more profitable than “A” borrowers.
In addition, given greater demand for Alt-mortgages and a constant funding supply, we may see "B" lenders exert more pricing power for a period of time.
From a broker perspective, this growth in near-prime lending is the silver lining of these rule changes. Comparison shopping is important for prime mortgages but it's utterly essential when it comes to non-prime mortgages. And brokers are the only significant source for this service.
9. Exceptions:
If you need a mortgage and have less than 20% equity, then as long as you apply before July 9, you will qualify under the old rules.
That’s true even if your purchase offer isn't final. “…The new parameters will not apply, even if the conditions of [a purchase] agreement have not been waived,” says the DoF.
If your application does not conform to the new insured mortgage guidelines, however, you’ll have to close by December 31, 2012.
Note: If your income situation, debt ratios or loan amount change, and you need to modify your mortgage after July 9, you may be bound by the new rules (even if you were already approved under the old rules).
10. Pre-approvals:
If you get pre-approved before July 9 and want to avoid the new rules, you’ll need to:
HELOC sales will drop once banks implement the B-20 guidelines. The reason: Fewer homeowners will meet the lower 65% loan-to-value (LTV) limit and higher qualification rates.
Fortunately, OSFI tells us it will not require existing HELOC holders with LTVs over 65% to drop down to 65% LTV.
Borrowers are still able to submit HELOC applications today at 80% loan-to-value. There’s no telling for how long. As the October 31, 2012 implementation deadline approaches for the big banks, we’ll see 80% LTVs start disappearing. It could happen sooner than some expect.
In the coming days, we’ll run a piece on how HELOC LTV changes impact the Smith Manoeuvre and similar leveraged investing strategies.
12. CB D/Ps R.I.P.:
According to one high-level bank exec we spoke with, Cashback downpayment mortgages look to be dead, effective October 31, 2012 (possibly much sooner). But no lender has announced anything on this, as of yet.
Cashback refinances, however, may live—unless the DoF ends up restricting them too.
Barring that, cashback refis may get more common as time goes on.
Borrowers can use CBs to refinance to 85% LTV, via an 80% LTV mortgage plus 5% cash back. They'll have to pay a cashback interest rate (1.70%+ higher on 5-year terms), but the "free" cash effectively reduces that rate premium to about 50 basis points. CB users also avoid the insurance premiums that typically apply to 85% LTV refinances.
Just beware of the cashback clawbacks if you get one of these mortgages and discharge it before maturity.
13. Debt Ratio Double-Whammy:
Debt ratios are one measure of how much mortgage you can afford. The new 39% gross debt service (GDS) limit will only impact high-ratio borrowers with a 680+ credit score. (High-ratio borrowers with scores below 680 are already capped at a 35% GDS.)
Dropping from 44% to 39% will restrict a subset of the market. Most people won’t be affected, however. The reason we say that is because the typical high-ratio buyer has a total debt service (TDS) ratio in the mid-30% range, according to analyst research we’ve seen. The latest CAAMP data on the subject estimates the TDS for all buyers combined at 32.5% (as of 2010).
That said, not everyone is immune from this GDS restriction. The new 39% cap will lower the maximum theoretical mortgage by roughly $57,000, or 12%, for a household earning $75,000. (This assumes a 3.09% 5-year fixed rate with a 25-year amortization, no debt and 5% down.)
If you combine that with the amortization reduction (from 30 to 25 years), it's quite a one-two punch—amounting to a 20% reduction in maximum theoretical purchasing power.
You better believe that will impact home prices, other things being equal. The good news is that the number of people this effects is relatively small and a 10% price drop would largely offset it. As mortgage rates rise, however, the GDS limit becomes more constraining.
14. Long-am Options:
After July 9, there will still be some lenders offering 30-year amortizations to people with 20% equity. But not the major banks.
If history is a guide, banks will enforce 25-year amortizations on all mortgages. Some might even do it before July 9.
15. Bundles:
According to OSFI, lenders will no longer be able to offer “a combination of a mortgage and other lending products (secured by the same property) in any form that facilitates circumvention of the maximum LTV ratio limit…”
There is question on how this will impact “bundle mortgages.” A bundle refers to an 80% LTV non-prime mortgage with another lender’s 5% second mortgage behind it. This lets non-prime lenders offer 85% LTV lending solutions.
Bundles exist partly to avoid mortgage insurance. Federally-regulated lenders must insure mortgages over 80% LTV by law. If another lender holds the 5% second, it's a way around that limitation. (Borrowers can also arrange 5% seconds on their own if they like.)
We can tell you, however, that many in the industry are anything but clear on it.
If one interprets OSFI’s rule as preventing lenders from promoting bundles (as we’ve defined them), that would seem unreasonable. The risk to the regulated first mortgage lender is negligible because the highest risk money (the extra 5% LTV) comes from a totally separate, private and uninsured lender with segregated capital. Moreover, the first mortgage lender underwrites its risk as if it were lending at 85% LTV or above anyway.
16. Million-Dollar Babies:
…are going down with the bathwater. People buying $1 million-plus properties will soon have to plunk down 20%. Otherwise, they’ll no longer qualify for high-ratio insurance.
That said, the Department of Finance tells CMT: “…$1 million properties with a down payment of at least 20% would still be eligible for (low-ratio) mortgage insurance offered by CMHC and private mortgage insurers.”
Flaherty says that wealthy people’s access to mortgage insurance is “not my concern…If someone can afford to pay a million dollars…they don’t really need CMHC. That’s not what CMHC is there for.”
If that’s true, Jim should probably update CMHC’s mandate. Last time we looked, its mandate was: “to allow as many Canadians as possible to access home-ownership on their own” and “in all parts of the country.” Vancouver and Toronto happen to be parts of the country, and they've got more $1+ million homes than homes under $300,000.
From a nationwide standpoint, high-ratio million-dollar mortgages are a small fraction of the pie. In Toronto and Vancouver, however, million-dollar home sales are 6-18% of the market respectively. 53% of single-family homes in Vancouver-proper are over a mil. (for now anyway).
By all accounts, a cut-off at $1 million is purely arbitrary. A million-dollar mortgage buys a lot less than it used to. Granted, it implies you’re better off than most, but it doesn’t make you “rich,” especially if you have to live in a major city.
There’s no public data on insured million-dollar mortgages, but CMHC tells us: “Of our total insurance-in-force distribution, five per cent of our mortgage portfolio had a loan amount exceeding $550,000 at origination. This includes high-ratio, low-ratio and multi-unit.” As a pure guess, high-ratio million-dollar mortgages are probably near or less than one per cent of CMHC’s overall portfolio.
Of course, even a fraction of one per cent of Canada’s 9.85 million homeowner households is tens of thousands of homes. If this news spooks a portion of those owners into selling more urgently, or concerned buyers defer buying, or buyers who need high-ratio insurance can’t get it, some high-end markets will suffer.
It’s worth noting that many million-dollar borrowers have sufficient net worth to make a 20 per cent down payment. They simply prefer to leverage their capital in other ways. Where that buyer has assets, impeccable credit and strong employment, those are very profitable low-risk insurance premiums for the government—premiums the government will no longer collect.
At day's end, assuming strong underwriting and conservative appraisals, the justification for this change is questionable. Alternatives could have been: (a) setting the $1M threshold higher, (b) raising premiums on $1M+ properties, or (c) scaling back insured loan-to-values over $1 million.
17. Appraisals:
OSFI says, “In general, FRFIs should conduct an on-site inspection on the underlying property…” Lenders can still use automated appraisals, but OSFI expects them to use live appraisers if an application is deemed higher risk.
It will be interesting to see if more high-LTV mortgages are appraised. Currently, lenders and default insurers rely on auto-valuation systems on most of these applications.
18. Renewals:
If you have a high-ratio insured mortgage with an amortization over 25 years, you shouldn’t have a problem renewing with your existing lender.
You’ll also still be able to switch lenders and keep an existing amortization over 25 years, assuming:
19. Changes for Self-employed:
Banks who still have flexible business-for-self (BFS) underwriting policies today (there aren’t many left), probably won’t for long. OSFI has put more pressure on lenders to obtain “reasonable…income verification” from self-employed borrowers, such as an NOA and business formation documentation. Banks have been checking those docs very closely for income reasonability.
Mainstream lenders may stiffen BFS qualifications in other ways as well. As a result, many self-employed borrowers who tax-manage their earnings (i.e., don’t pay themselves enough salaries or dividends) will find mainstream stated income programs ineffective. That’ll force some otherwise-qualified borrowers into the arms of alternative lenders with much higher interest rates.
Some critics might ask, "Why should the government take risk for self-employed borrowers?" To that, one could argue, why should the government take risk for any mortgage borrower?
The answer is beyond the scope of this article (which is long enough already), but in a nutshell: There are substantial economic and social benefits to making home ownership accessible to low-default-risk borrowers who contribute to job growth and pay a profitable insurance premium to the taxpayers of this country. Default risk is not linked to one-factor (income). It's determined by a borrower's total credit profile (assets, debts, cashflow, income stability, equity, beacon score, and so on).
20. Interest Savings:
The DoF’s press release heralded the “$150,000” that “typical” families could save in interest, thanks to it winding amortizations back to 25 years. That’s great, but this is no consolation for qualified borrowers who are forced to allocate cash flow towards a mortgage instead of better uses.
The fact that shorter amortizations save interest is simple mathematics. But that doesn't make a 25-year amz the optimal strategy (or lower risk) for all.
Many qualified borrowers are better off with a long amortization and lower payments. They can then budget that money towards a higher-returning use, which might include education, retirement investing, a small business or a contingency fund.
Flaherty says that "most Canadians” borrow responsibly. Unfortunately, those responsible people will be restricted by these rules nonetheless.
Ottawa could have made borrowers qualify at a 25-year amortization, and leave the option of 30-year amortizations for payment flexibility. Like it sometimes does, however, the government took an easy shotgun approach to regulation with few provisions for exception cases. But it wasn't really about that. The real aim behind the amortization change was to slow the market, plain and simple. Policymakers probably barely considered the micro-economic repercussions for individual borrowers.
The questions are, how long is long-term, how unpleasant are the side effects, and could those side effects have be minimized by a more incremental implementation?
Whatever the case, credit is due to the DoF, OSFI and Bank of Canada on two fronts: #1) They want to do the right thing, and #2) they are by no means intellectually challenged. All three consulted with some of the top minds in the country before making these decisions.
Their analysis has led them to conclude that deflating the housing market is appropriate at this uncertain juncture. Hopefully, their decision to substitute mortgage regulations for monetary policy works out. As Flaherty told reporters Thursday, it all comes down to a “judgment call.”
The government knew full well that borrowers would try to front-run these restrictions. So it provided only 18 days lead time until the changes take effect. Most lending execs had no idea that new mortgage insurance rules were imminent. As a result, lenders were not fully prepared.
Because of this, and because banks like to appear prudent to regulators, there's a chance some lenders may implement rules (like the 25-year amortization restriction) before the July 9, 2012 deadline.
2. The Stampede:
Seemingly every mortgage adviser in the country is blasting out emails advising clients about these changes. The sense of urgency will spike mortgage volumes near-term. But high-ratio borrowers who rush to get a 30-year amortization or 85% loan-to-value (LTV) refi should be warned:
- Underwriting during the interim period (June 21-July 8) may be especially vigilant, in an effort to weed out the marginal borrowers who spring from the woodwork
- For the next three weeks, the lenders with the best rates, or those that are less efficient or less staffed, could have abnormal underwriting delays (keep that in mind if you have financing condition deadlines)
- In most cases, mortgage rule changes are not a reason to rush a home purchase.
If you’re a well-qualified borrower, you’ll be happy to know that you just became more appealing to lenders. These rules will shrink the pool of prime borrowers. As a result, we’ll see bankers and brokers battle harder for your business. That means the rate wars that Flaherty “discourages” will intensify, whether banks publicize it or not.
4. Side-Effects:
Shorter amortizations, higher qualification rates and lower debt ratio limits will restrict buying power. To that, Flaherty says: “Good. I consider that desirable.”
Canada's 9.6 million existing homeowners, however, may not deem it so desirable—not if these actions trigger a bigger or longer-than-normal selloff that jeopardizes their home equity.
Equity is the biggest source of retirement savings for millions of Canadians. For this reason, even Flaherty would admit that these proposals are essentially a calculated gamble.
On the other hand, waiting for the market self-correct has its own risks, namely a much longer economic recovery if the speculative balloon is punctured.
Either way, the market is propelled by payment affordability. Reducing buying power will weigh on prices. Whether other supply/demand factors offset this pressure is unknowable.
The DoF wants Canadians to believe the side-effects won’t be extreme. And, if market reaction is anything like the 2008, 2010, and 2011 mortgage changes, it won't be.
Flaherty states that "less than five per cent of new home purchasers" will be affected by these changes. If he simply means buyers of brand new homes, five per cent equals ~9,600 people a year (based on CAAMP's 2012 housing starts estimates).
If Vegas made an over/under line on that 5% figure, we’d bet the “over.”
In the new-build market, there are 95,000 first-time buyers each year alone. If you include new and resale purchases, there are roughly 261,000 newbie buyers annually. These are people who are disproportionately affected by these changes, albeit a minority of them.
On top of this you have a minimum of five per cent of repeat buyers (20,000+ a year) that will likely be curtailed by the rule changes to amortizations, qualifications rates, stated income, and debt ratios.
5. The Amortization Effect:
Reducing amortizations to 25 years from 30 chops the maximum theoretical mortgage by roughly 9% (versus ~7% when amortizations dropped from 35 to 30 years). That’s equivalent to paying almost 1% more on your mortgage rate.
Put another way, a qualified family earning $75,000, with no debt, will qualify for $49,000 less mortgage by being forced to take a 25-year amortization.
According to CAAMP, 40% of new mortgages last year had amortizations over 25 years. Of all the new rules, this will have “the most direct impact on the Canadian housing market,” states RBC. It “will raise the barrier to entry into Canada’s housing market.” (That is Flaherty's point, of course.)
TD thinks it could take up to a year for changes like this to negatively impact prices. But some expect a more imminent result.
Robert Kavcic of BMO Nesbitt Burns notes: “After the 35-year amortization was eliminated last March…existing home sales fell by more than 3 per cent over the subsequent two months.”
6. Market Stability:
Most industry observers, ourselves included, believe in the merits of shifting some housing risk to the private sector and building savings rates. "Our economy cannot . . . depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” explains BoC chief Mark Carney.
The government adds that these new rules will bring “long-term stability” to Canada’s real estate market. Note: They say “long term” because they know the effects could be adverse in the short term. The DoF calls that risk “manageable,” however.
Home prices, which are already self-correcting in various regions, will see additional pressure as payment affordability drops. (Ironically, a correction in prices would then, in theory, improve affordability.)
Flaherty has “tapped the brakes at precisely the right time,” says BMO CEO Frank Techar. From our viewpoint it's more like stopping short than a little tap.
All one can hope for is that the brakes don’t lock up, with mortgage affordability being so intimately related to home prices.
That’s partly why the Canadian Association of Accredited Mortgage Professionals (CAAMP) feels the government has “overreached” with this latest round of changes. In a statement Thursday it said:
“CAAMP believes that Canadians understand the importance of paying down their mortgages. These changes, together with new OSFI underwriting guidelines…may precipitate the housing market downturn the government so desperately wants to avoid.”But heck. With housing-related activity comprising 1/5 of GDP and resale housing adding ~$20 billion in spending and 165,000+ jobs this year, what’s the worst that could happen?
7. So Much for High-Ratio Refis:
Refinances above 80% LTV will soon be a memory at prime lenders. Refinance volumes will then fall off a small cliff. The last time the Ottawa lowered LTVs on refis, insured refinances tumbled 22% (source: CMHC).
The result will be more people being saddled with high interest debt that they can’t refinance. (Insert your favourite home-ATM analogy here.)
We’ll also see home improvement spending slow. The renovation business is a $66 billion industry and $17+ billion a year is financed with mortgages and HELOCs. (Reining in overleveraged and chronic home renovators is healthy. They are a small wedge of the refi pie, however.)
If you own an average priced home, you’ll be able to refinance $18,780 less debt to your mortgage. If your rate on that debt is 19.99%, for example, the 80% LTV refi restriction could cost you an extra $9,000+ in interest (or more if it takes greater than five years to pay off that rolled-in debt).
On the upside, a loan-to-value ≤ 80% would save you $5,587 in default insurance premiums.
Now more than ever, it will pay to have a competant mortgage adviser run the math and compare all your refi options.
8. Non-Prime is Where It’s at:
Alternative lenders like Equitable Trust and Home Trust are lovin’ life. Their target market has just expanded as regulators force banks to turn away more near-prime borrowers.
If alternative lenders can manage defaults through the eventual housing downturn, they’ll profit handsomely from this volume boost. We're talking borrowers who are less rate sensitive (because they have fewer options) and at least three times more profitable than “A” borrowers.
In addition, given greater demand for Alt-mortgages and a constant funding supply, we may see "B" lenders exert more pricing power for a period of time.
From a broker perspective, this growth in near-prime lending is the silver lining of these rule changes. Comparison shopping is important for prime mortgages but it's utterly essential when it comes to non-prime mortgages. And brokers are the only significant source for this service.
9. Exceptions:
If you need a mortgage and have less than 20% equity, then as long as you apply before July 9, you will qualify under the old rules.
That’s true even if your purchase offer isn't final. “…The new parameters will not apply, even if the conditions of [a purchase] agreement have not been waived,” says the DoF.
If your application does not conform to the new insured mortgage guidelines, however, you’ll have to close by December 31, 2012.
Note: If your income situation, debt ratios or loan amount change, and you need to modify your mortgage after July 9, you may be bound by the new rules (even if you were already approved under the old rules).
10. Pre-approvals:
If you get pre-approved before July 9 and want to avoid the new rules, you’ll need to:
a) Have a purchase agreement dated before July 9, and11. HELOC Pullback:
b) Apply for a full mortgage approval before July 9.
HELOC sales will drop once banks implement the B-20 guidelines. The reason: Fewer homeowners will meet the lower 65% loan-to-value (LTV) limit and higher qualification rates.
Fortunately, OSFI tells us it will not require existing HELOC holders with LTVs over 65% to drop down to 65% LTV.
Borrowers are still able to submit HELOC applications today at 80% loan-to-value. There’s no telling for how long. As the October 31, 2012 implementation deadline approaches for the big banks, we’ll see 80% LTVs start disappearing. It could happen sooner than some expect.
In the coming days, we’ll run a piece on how HELOC LTV changes impact the Smith Manoeuvre and similar leveraged investing strategies.
12. CB D/Ps R.I.P.:
According to one high-level bank exec we spoke with, Cashback downpayment mortgages look to be dead, effective October 31, 2012 (possibly much sooner). But no lender has announced anything on this, as of yet.
Cashback refinances, however, may live—unless the DoF ends up restricting them too.
Barring that, cashback refis may get more common as time goes on.
Borrowers can use CBs to refinance to 85% LTV, via an 80% LTV mortgage plus 5% cash back. They'll have to pay a cashback interest rate (1.70%+ higher on 5-year terms), but the "free" cash effectively reduces that rate premium to about 50 basis points. CB users also avoid the insurance premiums that typically apply to 85% LTV refinances.
Just beware of the cashback clawbacks if you get one of these mortgages and discharge it before maturity.
13. Debt Ratio Double-Whammy:
Debt ratios are one measure of how much mortgage you can afford. The new 39% gross debt service (GDS) limit will only impact high-ratio borrowers with a 680+ credit score. (High-ratio borrowers with scores below 680 are already capped at a 35% GDS.)
Dropping from 44% to 39% will restrict a subset of the market. Most people won’t be affected, however. The reason we say that is because the typical high-ratio buyer has a total debt service (TDS) ratio in the mid-30% range, according to analyst research we’ve seen. The latest CAAMP data on the subject estimates the TDS for all buyers combined at 32.5% (as of 2010).
That said, not everyone is immune from this GDS restriction. The new 39% cap will lower the maximum theoretical mortgage by roughly $57,000, or 12%, for a household earning $75,000. (This assumes a 3.09% 5-year fixed rate with a 25-year amortization, no debt and 5% down.)
If you combine that with the amortization reduction (from 30 to 25 years), it's quite a one-two punch—amounting to a 20% reduction in maximum theoretical purchasing power.
You better believe that will impact home prices, other things being equal. The good news is that the number of people this effects is relatively small and a 10% price drop would largely offset it. As mortgage rates rise, however, the GDS limit becomes more constraining.
14. Long-am Options:
After July 9, there will still be some lenders offering 30-year amortizations to people with 20% equity. But not the major banks.
If history is a guide, banks will enforce 25-year amortizations on all mortgages. Some might even do it before July 9.
15. Bundles:
According to OSFI, lenders will no longer be able to offer “a combination of a mortgage and other lending products (secured by the same property) in any form that facilitates circumvention of the maximum LTV ratio limit…”
There is question on how this will impact “bundle mortgages.” A bundle refers to an 80% LTV non-prime mortgage with another lender’s 5% second mortgage behind it. This lets non-prime lenders offer 85% LTV lending solutions.
Bundles exist partly to avoid mortgage insurance. Federally-regulated lenders must insure mortgages over 80% LTV by law. If another lender holds the 5% second, it's a way around that limitation. (Borrowers can also arrange 5% seconds on their own if they like.)
As a side note, and slightly unrelated: This 80% uninsured LTV limit is rumoured to be one reason why TD shut down TDFS. The speculation was that OSFI didn’t like the fact TDFS was offering 85-90% LTV uninsured mortgages—albeit through a structure that was technically onside of the regs.The OSFI spokesperson we asked wasn't able to offer clarity on the bundle question, other than to say, “The language in the guideline is clear.”
We can tell you, however, that many in the industry are anything but clear on it.
If one interprets OSFI’s rule as preventing lenders from promoting bundles (as we’ve defined them), that would seem unreasonable. The risk to the regulated first mortgage lender is negligible because the highest risk money (the extra 5% LTV) comes from a totally separate, private and uninsured lender with segregated capital. Moreover, the first mortgage lender underwrites its risk as if it were lending at 85% LTV or above anyway.
16. Million-Dollar Babies:
…are going down with the bathwater. People buying $1 million-plus properties will soon have to plunk down 20%. Otherwise, they’ll no longer qualify for high-ratio insurance.
That said, the Department of Finance tells CMT: “…$1 million properties with a down payment of at least 20% would still be eligible for (low-ratio) mortgage insurance offered by CMHC and private mortgage insurers.”
Flaherty says that wealthy people’s access to mortgage insurance is “not my concern…If someone can afford to pay a million dollars…they don’t really need CMHC. That’s not what CMHC is there for.”
If that’s true, Jim should probably update CMHC’s mandate. Last time we looked, its mandate was: “to allow as many Canadians as possible to access home-ownership on their own” and “in all parts of the country.” Vancouver and Toronto happen to be parts of the country, and they've got more $1+ million homes than homes under $300,000.
From a nationwide standpoint, high-ratio million-dollar mortgages are a small fraction of the pie. In Toronto and Vancouver, however, million-dollar home sales are 6-18% of the market respectively. 53% of single-family homes in Vancouver-proper are over a mil. (for now anyway).
By all accounts, a cut-off at $1 million is purely arbitrary. A million-dollar mortgage buys a lot less than it used to. Granted, it implies you’re better off than most, but it doesn’t make you “rich,” especially if you have to live in a major city.
There’s no public data on insured million-dollar mortgages, but CMHC tells us: “Of our total insurance-in-force distribution, five per cent of our mortgage portfolio had a loan amount exceeding $550,000 at origination. This includes high-ratio, low-ratio and multi-unit.” As a pure guess, high-ratio million-dollar mortgages are probably near or less than one per cent of CMHC’s overall portfolio.
Of course, even a fraction of one per cent of Canada’s 9.85 million homeowner households is tens of thousands of homes. If this news spooks a portion of those owners into selling more urgently, or concerned buyers defer buying, or buyers who need high-ratio insurance can’t get it, some high-end markets will suffer.
It’s worth noting that many million-dollar borrowers have sufficient net worth to make a 20 per cent down payment. They simply prefer to leverage their capital in other ways. Where that buyer has assets, impeccable credit and strong employment, those are very profitable low-risk insurance premiums for the government—premiums the government will no longer collect.
At day's end, assuming strong underwriting and conservative appraisals, the justification for this change is questionable. Alternatives could have been: (a) setting the $1M threshold higher, (b) raising premiums on $1M+ properties, or (c) scaling back insured loan-to-values over $1 million.
17. Appraisals:
OSFI says, “In general, FRFIs should conduct an on-site inspection on the underlying property…” Lenders can still use automated appraisals, but OSFI expects them to use live appraisers if an application is deemed higher risk.
It will be interesting to see if more high-LTV mortgages are appraised. Currently, lenders and default insurers rely on auto-valuation systems on most of these applications.
18. Renewals:
If you have a high-ratio insured mortgage with an amortization over 25 years, you shouldn’t have a problem renewing with your existing lender.
You’ll also still be able to switch lenders and keep an existing amortization over 25 years, assuming:
- You don’t increase your loan amount.
- Your loan-to-value doesn’t increase (which could happen if home prices dive), and
- You have a regular mortgage (i.e., it’s not a collateral charge mortgage).
19. Changes for Self-employed:
Banks who still have flexible business-for-self (BFS) underwriting policies today (there aren’t many left), probably won’t for long. OSFI has put more pressure on lenders to obtain “reasonable…income verification” from self-employed borrowers, such as an NOA and business formation documentation. Banks have been checking those docs very closely for income reasonability.
Mainstream lenders may stiffen BFS qualifications in other ways as well. As a result, many self-employed borrowers who tax-manage their earnings (i.e., don’t pay themselves enough salaries or dividends) will find mainstream stated income programs ineffective. That’ll force some otherwise-qualified borrowers into the arms of alternative lenders with much higher interest rates.
Some critics might ask, "Why should the government take risk for self-employed borrowers?" To that, one could argue, why should the government take risk for any mortgage borrower?
The answer is beyond the scope of this article (which is long enough already), but in a nutshell: There are substantial economic and social benefits to making home ownership accessible to low-default-risk borrowers who contribute to job growth and pay a profitable insurance premium to the taxpayers of this country. Default risk is not linked to one-factor (income). It's determined by a borrower's total credit profile (assets, debts, cashflow, income stability, equity, beacon score, and so on).
20. Interest Savings:
The DoF’s press release heralded the “$150,000” that “typical” families could save in interest, thanks to it winding amortizations back to 25 years. That’s great, but this is no consolation for qualified borrowers who are forced to allocate cash flow towards a mortgage instead of better uses.
The fact that shorter amortizations save interest is simple mathematics. But that doesn't make a 25-year amz the optimal strategy (or lower risk) for all.
Many qualified borrowers are better off with a long amortization and lower payments. They can then budget that money towards a higher-returning use, which might include education, retirement investing, a small business or a contingency fund.
Flaherty says that "most Canadians” borrow responsibly. Unfortunately, those responsible people will be restricted by these rules nonetheless.
Ottawa could have made borrowers qualify at a 25-year amortization, and leave the option of 30-year amortizations for payment flexibility. Like it sometimes does, however, the government took an easy shotgun approach to regulation with few provisions for exception cases. But it wasn't really about that. The real aim behind the amortization change was to slow the market, plain and simple. Policymakers probably barely considered the micro-economic repercussions for individual borrowers.
*******
Despite the short-term pain and any critical comments above, it is clear that housing volatility will be reduced by these moves, over the long term. And that’s a positive...if you look far enough out.The questions are, how long is long-term, how unpleasant are the side effects, and could those side effects have be minimized by a more incremental implementation?
Whatever the case, credit is due to the DoF, OSFI and Bank of Canada on two fronts: #1) They want to do the right thing, and #2) they are by no means intellectually challenged. All three consulted with some of the top minds in the country before making these decisions.
Their analysis has led them to conclude that deflating the housing market is appropriate at this uncertain juncture. Hopefully, their decision to substitute mortgage regulations for monetary policy works out. As Flaherty told reporters Thursday, it all comes down to a “judgment call.”
Monday, 25 June 2012
Friday, 22 June 2012
You still don’t need a lot of cash to buy a house, unless you’re rich
Garry Marr
You still don’t need much cash to buy a home in this country — unless you are rich.
A fourth-round of mortgage rules unveiled by Jim Flaherty, the finance minister, didn’t touch the one issue the real estate industry is most scared of — increasing the minimum down payment for loans covered by mortgage default insurance which is backed by the federal government. The rule is still that you need just a 5% down payment in Canada to buy a home. It’s actually less when you consider you can add the cost of your mortgage default insurance onto your mortgage taking you up to 97%-98% of the value of your home.
“They just keep going around this. What is the goal here? Not to have a crashing housing market. To protect banks from having huge losses or to protect people from losing their house,” said Ted Rechtshaffen, president of TriDelta Financial. “The elephant in the room is why they didn’t increase the down payment.”
Most of the real estate industry has been loathe to see that down payment level increase and some banks will actually help you get that 5% with what is called a cash back. You get 5% of the value of your mortgage up front in exchange for a higher mortgage rate over the life of the contract. But the statistics are out there that an increase in the down payment would have had a dramatic effect, far more than the 5% of the market Mr. Flaherty suggested would be impacted by his latest changes. A study this month from the Canadian Association of Accredited Mortgage Professionals estimated half a million sales since 2007 would have been lost if the minimum down payment level was doubled. CAAMP asked respondents what would happen if they were asked for a 10% down payment. Of those who purchased since 2007, 45% say it would take them out of market and another 14% were not sure — about 100,000 lost deals a year.
‘Do you really want people using their homes like an ATM?’
One group of people who will have to come up with more cash are the rich, though they are not really that wealthy by today’s housing standards. There will be no more government-backed insurance on homes worth more than $1-million.
“You have the guy with $2-million home who might not want $400,000 tied up [in equity],” said Mr. Rechtshaffen. “You might be a doctor, 30, making $300,000 who doesn’t want to start with a crappy house who wants to buy a house that will be good for 10 years.”
The government is going to force you to pay down your mortgage at a faster pace, reducing the maximum amortization to 25 years which is where it was when this housing boom began. It had ballooned to 40 years at one point. The impact will be that consumers will qualify for less mortgage because of a larger monthly payment, but save thousands in interest.
The banks had already been encouraging consumers to amortize over 25 years by enticing them with low rates, with Bank of Montreal leading the charge with a 2.99% mortgage earlier this year for a five-year term as long you took the shorter length. Vince Gaetano, a principal at Monster Mortgage, applauded the new rules and expects it will cut back on bidding wars on the high end because people who go over $1-million will not be able to get insurance. He added that new rules on the maximum gross debt service ratio to be set at 39% will hamper how large a mortgage a consumer can get. It was 44%.
“What does it mean in real dollars? If I had a client with $100,000 household income, I can no longer use 44%, that’s five grand. In mortgage amount, based on 3.19%, that’s about $90,000 less mortgage they can get,” said Mr. Gaetano. He added that reducing the percentage level for refinancing from 85% to 80% will further impact that market. “When they reduced from 90% to 85% [last year] it killed the market,” said Mr. Gaetano. “But do you really want people using their homes like an ATM?”
You still don’t need much cash to buy a home in this country — unless you are rich.
A fourth-round of mortgage rules unveiled by Jim Flaherty, the finance minister, didn’t touch the one issue the real estate industry is most scared of — increasing the minimum down payment for loans covered by mortgage default insurance which is backed by the federal government. The rule is still that you need just a 5% down payment in Canada to buy a home. It’s actually less when you consider you can add the cost of your mortgage default insurance onto your mortgage taking you up to 97%-98% of the value of your home.
“They just keep going around this. What is the goal here? Not to have a crashing housing market. To protect banks from having huge losses or to protect people from losing their house,” said Ted Rechtshaffen, president of TriDelta Financial. “The elephant in the room is why they didn’t increase the down payment.”
Most of the real estate industry has been loathe to see that down payment level increase and some banks will actually help you get that 5% with what is called a cash back. You get 5% of the value of your mortgage up front in exchange for a higher mortgage rate over the life of the contract. But the statistics are out there that an increase in the down payment would have had a dramatic effect, far more than the 5% of the market Mr. Flaherty suggested would be impacted by his latest changes. A study this month from the Canadian Association of Accredited Mortgage Professionals estimated half a million sales since 2007 would have been lost if the minimum down payment level was doubled. CAAMP asked respondents what would happen if they were asked for a 10% down payment. Of those who purchased since 2007, 45% say it would take them out of market and another 14% were not sure — about 100,000 lost deals a year.
‘Do you really want people using their homes like an ATM?’
One group of people who will have to come up with more cash are the rich, though they are not really that wealthy by today’s housing standards. There will be no more government-backed insurance on homes worth more than $1-million.
“You have the guy with $2-million home who might not want $400,000 tied up [in equity],” said Mr. Rechtshaffen. “You might be a doctor, 30, making $300,000 who doesn’t want to start with a crappy house who wants to buy a house that will be good for 10 years.”
The government is going to force you to pay down your mortgage at a faster pace, reducing the maximum amortization to 25 years which is where it was when this housing boom began. It had ballooned to 40 years at one point. The impact will be that consumers will qualify for less mortgage because of a larger monthly payment, but save thousands in interest.
The banks had already been encouraging consumers to amortize over 25 years by enticing them with low rates, with Bank of Montreal leading the charge with a 2.99% mortgage earlier this year for a five-year term as long you took the shorter length. Vince Gaetano, a principal at Monster Mortgage, applauded the new rules and expects it will cut back on bidding wars on the high end because people who go over $1-million will not be able to get insurance. He added that new rules on the maximum gross debt service ratio to be set at 39% will hamper how large a mortgage a consumer can get. It was 44%.
“What does it mean in real dollars? If I had a client with $100,000 household income, I can no longer use 44%, that’s five grand. In mortgage amount, based on 3.19%, that’s about $90,000 less mortgage they can get,” said Mr. Gaetano. He added that reducing the percentage level for refinancing from 85% to 80% will further impact that market. “When they reduced from 90% to 85% [last year] it killed the market,” said Mr. Gaetano. “But do you really want people using their homes like an ATM?”
Thursday, 21 June 2012
Flaherty clamps down on mortgage rules to cool overheating market
Bill Curry and Grant Robertson / Ottawa — The Globe and Mail
Published Thursday, Jun. 21 2012, 8:21 AM EDT
Acknowledging his concern that Canada’s housing market is overheating, Finance Minister Jim Flaherty is clamping down with four changes to mortgage insurance rules.
At a news conference in Ottawa, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years. Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent.
In an effort to ensure taxpayer-backed mortgages are not going to wealthy Canadians, the availability of insured mortgages will be limited to homes with a purchase price of less than $1-million.
And lastly, there will also be a new rule aimed at ensuring the size of a loan is not too big in comparison to household income. The maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.
The changes will take effect on July 9, 2012.
“We want people to make sure that when they purchase the most important purchase they’ll probably ever make in their life, that they do so in a prudent way. And some calming of the market is desirable,” said Mr. Flaherty.
The minister said his department has conducted an analysis of the expected impact the changes will have on the Canadian economy, but he only provided some of that detail.
He said Ottawa expects that less than 5 per cent of new home purchasers will be affected by the changes. That means some people will choose not to buy a home.
“It will also mean that some people will buy less into the market, so they’ll buy a less expensive home or a less expensive condominium. Good. I consider that desirable,” he said. “So if it has that kind of a cooling effect, that to me is a good thing.”
Though Canada's big banks were caught off guard by the mortgage changes when word of the adjustments emerged late Wednesday, some lenders said Thursday they support the changes.
"Canadian household debt levels have reached levels that raise concern,” Tim Hockey, head of retail banking at Toronto-Dominion Bank said.
The government's moves "take direct aim at the issue and they should have a substantial moderating effect on the growth of Canadians' debt levels," Mr. Hockey said.
Bank of Montreal called the changes prudent and responsible.
"The new measures will support the long-term stability of the Canadian housing market," said Frank Techar, head of personal and commercial banking at BMO.
"Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada's housing market experiences a soft landing."
One of the issues driving Mr. Flaherty's concern is the continued construction of condos in larger cities and the fact that prices continue to rise in spite of this added supply. He said this is a particular concern in Toronto, but he also mentioned Vancouver, Montreal and Quebec City.
While Mr. Flaherty would not comment directly on expectations that the Bank of Canada will keep interest rates low for some time, he did note that the U.S. Federal Reserve is not expected to raise interest rates as it tries to stimulate the U.S. economy.
That leaves changes to mortgage policy as one of the available tools for Ottawa to use in order to dissuade Canadians for taking too much advantage of ultra low rates and piling on debt that could become unaffordable at higher interest rates.
“It’s just a question of trying to moderate behaviour and I hope that Canadians will reflect before they jump into a market at the high end,” said Mr. Flaherty.
Several Canadian banks had been urging Ottawa to tighten mortgage rules and the minister had previously stated that there was nothing stopping the private sector lenders from tightening the rules themselves.
Published Thursday, Jun. 21 2012, 8:21 AM EDT
Acknowledging his concern that Canada’s housing market is overheating, Finance Minister Jim Flaherty is clamping down with four changes to mortgage insurance rules.
At a news conference in Ottawa, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years. Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent.
In an effort to ensure taxpayer-backed mortgages are not going to wealthy Canadians, the availability of insured mortgages will be limited to homes with a purchase price of less than $1-million.
And lastly, there will also be a new rule aimed at ensuring the size of a loan is not too big in comparison to household income. The maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.
The changes will take effect on July 9, 2012.
“We want people to make sure that when they purchase the most important purchase they’ll probably ever make in their life, that they do so in a prudent way. And some calming of the market is desirable,” said Mr. Flaherty.
The minister said his department has conducted an analysis of the expected impact the changes will have on the Canadian economy, but he only provided some of that detail.
He said Ottawa expects that less than 5 per cent of new home purchasers will be affected by the changes. That means some people will choose not to buy a home.
“It will also mean that some people will buy less into the market, so they’ll buy a less expensive home or a less expensive condominium. Good. I consider that desirable,” he said. “So if it has that kind of a cooling effect, that to me is a good thing.”
Though Canada's big banks were caught off guard by the mortgage changes when word of the adjustments emerged late Wednesday, some lenders said Thursday they support the changes.
"Canadian household debt levels have reached levels that raise concern,” Tim Hockey, head of retail banking at Toronto-Dominion Bank said.
The government's moves "take direct aim at the issue and they should have a substantial moderating effect on the growth of Canadians' debt levels," Mr. Hockey said.
Bank of Montreal called the changes prudent and responsible.
"The new measures will support the long-term stability of the Canadian housing market," said Frank Techar, head of personal and commercial banking at BMO.
"Minister Flaherty has tapped the brakes at precisely the right time and his actions should help ensure Canada's housing market experiences a soft landing."
One of the issues driving Mr. Flaherty's concern is the continued construction of condos in larger cities and the fact that prices continue to rise in spite of this added supply. He said this is a particular concern in Toronto, but he also mentioned Vancouver, Montreal and Quebec City.
While Mr. Flaherty would not comment directly on expectations that the Bank of Canada will keep interest rates low for some time, he did note that the U.S. Federal Reserve is not expected to raise interest rates as it tries to stimulate the U.S. economy.
That leaves changes to mortgage policy as one of the available tools for Ottawa to use in order to dissuade Canadians for taking too much advantage of ultra low rates and piling on debt that could become unaffordable at higher interest rates.
“It’s just a question of trying to moderate behaviour and I hope that Canadians will reflect before they jump into a market at the high end,” said Mr. Flaherty.
Several Canadian banks had been urging Ottawa to tighten mortgage rules and the minister had previously stated that there was nothing stopping the private sector lenders from tightening the rules themselves.
Wednesday, 20 June 2012
Banks go on appraisal alert in a volatile housing market
TARA PERKINS and GRANT ROBERTSON
Lenders use a variety of techniques, including full appraisals, so-called “drive-by” appraisals based on the exterior of the home, and databases of market prices, to evaluate homes. The values they arrive at help determine how much money they should lend to mortgage borrowers. They are also key for measures such as the loan-to-value ratio that are used to track the health of loan portfolios and borrowers’ debt loads.
Banks are emphasizing on-site visits to value properties, especially those above a certain price or in rural areas. They are also paying closer attention to who does the appraisal. The higher level of diligence aims to get more accurate values amid fears of an overheated housing market. If standards tighten or appraisals become more conservative, it could result in a decrease of the amount of mortgages that banks lend.
Appraisal values become most important to banks when a borrower defaults, and the bank has to sell the property to recoup money. Their accuracy is especially important in the current environment, in which home prices are believed to be inflated and borrowers are taking on record debt levels, increasing the risk of defaults.
There has been no suggestion of widespread or serious problems in Canada’s appraisal system, and bankers say they are comfortable with the values on their books. But lenders and regulators have recently been scrutinizing appraisal systems in an effort to ensure that these values are as accurate as possible.
“We have tightened our process, and make sure that we are getting an accurate read,” David McKay, the head of Canadian banking at Royal Bank of Canada, the country’s largest mortgage lender, told analysts on a recent conference call. “When you think you have an 80 per cent loan-to-value ratio, you want to make sure you have an 80 per cent loan-to-value ratio.”
Mark Chauvin, Toronto-Dominion Bank’s chief risk officer, told analysts that in some of the hotter markets such as Vancouver and Toronto, appraisal values are coming in slightly above purchase prices.
“We’re really not seeing a lot of it,” he said. “But we feel our existing policies will protect us against that.”
TD lends 80 per cent loan-to-value up to $900,000, but after that only lends 50 per cent, to protect itself against inflated values on expensive homes. “So if you take a $2-million house, you get a loan-to-value of 56 per cent under the sliding scale,” he said.
Some banks began to focus more on this last year, after an American insurance company reported a significant charge in connection with insurance it was selling to them. That insurance was covering risks associated with the possibility that appraisal values were off.
California-based First American Financial Corp. had been selling Canadian banks a “guaranteed valuation” product that guaranteed the valuation of a property was accurate on the day a mortgage was issued. If it turned out later that it wasn’t, the bank could make a claim.
But First American posted a first-quarter loss in 2011 as it took a $45-million reserve strengthening charge relating to this obscure Canadian product.
Policies that were experiencing claims had been written mostly in 2007 and 2008. Sources say the issue stemmed mainly from Alberta, where the housing market underwent a correction starting in 2007, and problems became apparent as default rates increased, leading banks to seize more homes as collateral.
“This is just a case where we mispriced the risk,” First American CEO Dennis Gilmore told analysts. (The firm declined to comment).
The company is no longer offering that insurance in the same form, bankers said. “It’s a big change in the industry; we’ve all kind of morphed our property valuation strategies as a result of this occurring,” said a senior banker.
Spokespeople at Bank of Montreal and Bank of Nova Scotia said Monday that their institutions were already focused on in-person appraisals.
The Office of the Superintendent of Financial Institutions is ushering in new mortgage underwriting rules that require banks to have clear policies outlining how they value properties. It is urging them to use a combination of tools, and to include a comprehensive on-site appraisal unless there’s an appropriate reason to use an alternative method.
Banks “should not use title insurance or valuation insurance as a substitute for a sound appraisal or valuation process,” OSFI stated.
The Globe and Mail
Several Canadian banks have been quietly re-evaluating their appraisal strategies amid increased worries about the accuracy of property values in a market deemed at risk of overheating.
Banks are emphasizing on-site visits to value properties, especially those above a certain price or in rural areas. They are also paying closer attention to who does the appraisal. The higher level of diligence aims to get more accurate values amid fears of an overheated housing market. If standards tighten or appraisals become more conservative, it could result in a decrease of the amount of mortgages that banks lend.
Appraisal values become most important to banks when a borrower defaults, and the bank has to sell the property to recoup money. Their accuracy is especially important in the current environment, in which home prices are believed to be inflated and borrowers are taking on record debt levels, increasing the risk of defaults.
There has been no suggestion of widespread or serious problems in Canada’s appraisal system, and bankers say they are comfortable with the values on their books. But lenders and regulators have recently been scrutinizing appraisal systems in an effort to ensure that these values are as accurate as possible.
“We have tightened our process, and make sure that we are getting an accurate read,” David McKay, the head of Canadian banking at Royal Bank of Canada, the country’s largest mortgage lender, told analysts on a recent conference call. “When you think you have an 80 per cent loan-to-value ratio, you want to make sure you have an 80 per cent loan-to-value ratio.”
Mark Chauvin, Toronto-Dominion Bank’s chief risk officer, told analysts that in some of the hotter markets such as Vancouver and Toronto, appraisal values are coming in slightly above purchase prices.
“We’re really not seeing a lot of it,” he said. “But we feel our existing policies will protect us against that.”
TD lends 80 per cent loan-to-value up to $900,000, but after that only lends 50 per cent, to protect itself against inflated values on expensive homes. “So if you take a $2-million house, you get a loan-to-value of 56 per cent under the sliding scale,” he said.
Some banks began to focus more on this last year, after an American insurance company reported a significant charge in connection with insurance it was selling to them. That insurance was covering risks associated with the possibility that appraisal values were off.
California-based First American Financial Corp. had been selling Canadian banks a “guaranteed valuation” product that guaranteed the valuation of a property was accurate on the day a mortgage was issued. If it turned out later that it wasn’t, the bank could make a claim.
But First American posted a first-quarter loss in 2011 as it took a $45-million reserve strengthening charge relating to this obscure Canadian product.
Policies that were experiencing claims had been written mostly in 2007 and 2008. Sources say the issue stemmed mainly from Alberta, where the housing market underwent a correction starting in 2007, and problems became apparent as default rates increased, leading banks to seize more homes as collateral.
“This is just a case where we mispriced the risk,” First American CEO Dennis Gilmore told analysts. (The firm declined to comment).
The company is no longer offering that insurance in the same form, bankers said. “It’s a big change in the industry; we’ve all kind of morphed our property valuation strategies as a result of this occurring,” said a senior banker.
Spokespeople at Bank of Montreal and Bank of Nova Scotia said Monday that their institutions were already focused on in-person appraisals.
The Office of the Superintendent of Financial Institutions is ushering in new mortgage underwriting rules that require banks to have clear policies outlining how they value properties. It is urging them to use a combination of tools, and to include a comprehensive on-site appraisal unless there’s an appropriate reason to use an alternative method.
Banks “should not use title insurance or valuation insurance as a substitute for a sound appraisal or valuation process,” OSFI stated.
Tuesday, 19 June 2012
Recreational property sales higher in majority of markets, RE/MAX says
By The Canadian Press
MISSISSAUGA, Ont. - Lower prices, increased selection and a rebound in consumer confidence have helped drive sales of recreational properties higher in a majority of communities reviewed across the country, real estate firm RE/MAX says.
RE/MAX said of the 33 markets included in its report, sales were ahead of last year's mark in 70 per cent of the communities, while six per cent were in line with a year ago.
Starting prices were down in 49 per cent of the markets, while 33 per cent were unchanged.
The remaining saw an increase.
"Recovery is still in its early stages, but there are subtle differences on the recreational property front this year," said Michael Polzler, RE/MAX's executive vice-president for the Ontario-Atlantic region.
"The gains are more widespread, affecting more markets and regions. Affordability has provided some serious stimulus, but renewed consumer confidence is the true driver.
"Buyers will simply not move forward if any doubts exist — economic or otherwise."
RE/MAX noted that sales among baby boomers have softened, compared with previous years as low prices in the southern U.S. have drawn away some buyers.
However, the firm noted that younger families and first-time buyers have stepped in to fill the void in most markets.
MISSISSAUGA, Ont. - Lower prices, increased selection and a rebound in consumer confidence have helped drive sales of recreational properties higher in a majority of communities reviewed across the country, real estate firm RE/MAX says.
RE/MAX said of the 33 markets included in its report, sales were ahead of last year's mark in 70 per cent of the communities, while six per cent were in line with a year ago.
Starting prices were down in 49 per cent of the markets, while 33 per cent were unchanged.
The remaining saw an increase.
"Recovery is still in its early stages, but there are subtle differences on the recreational property front this year," said Michael Polzler, RE/MAX's executive vice-president for the Ontario-Atlantic region.
"The gains are more widespread, affecting more markets and regions. Affordability has provided some serious stimulus, but renewed consumer confidence is the true driver.
"Buyers will simply not move forward if any doubts exist — economic or otherwise."
RE/MAX noted that sales among baby boomers have softened, compared with previous years as low prices in the southern U.S. have drawn away some buyers.
However, the firm noted that younger families and first-time buyers have stepped in to fill the void in most markets.
Monday, 18 June 2012
Friday, 15 June 2012
Canada’s housing market stronger than forecast
The Canadian Press
TORONTO — The Canadian Real Estate Association said Friday that the national home price and sales activity this year will be higher than previously forecast, following a strong spring.
It now forecasts 475,800 homes will be sold in 2012, up 3.8% from 2011, compared with earlier expectations of a gain of 0.3%.
The average home price is forecast to rise by 2.2% to $370,700 in 2012 compared with an earlier expectation that it would fall 1.1%.
“National activity over spring months was stronger than anticipated,” CREA president Wayne Moen said in a statement.
“This shows clearly how the continuation of low interest rates is keeping homeownership affordable and within reach.”
CREA had previously forecast 2012 and 2013 sales volume would be on par with the 10-year average, but it now expects them to be slightly above that.
CREA expects 470,200 sales in 2013, down 1.1% from this year, compared with the earlier forecast of 457,200.
The increased outlook for the year came as CREA reported homes sales last month fell 3.1% compared with April, but remained up from a year ago.
The group said sales volume rose 9% from May 2011, while the Canadian average price slipped marginally to $375,605, down 0.3%.
Continued overall strength in the housing market, largely due to the staying power of low interest rates, has led some economists to warn the market is overvalued.
That could make homeowners vulnerable to a downturn, especially those who have used low interest rates to borrow more than they could otherwise afford.
The Bank of Canada and federal Finance Minister Jim Flaherty have cautioned Canadians repeatedly to moderate borrowing on real estate, declaring household debt to be the domestic economy’s number one enemy.
The bank noted certain segments of the housing market that have a persistent oversupply — such as condos in Toronto — face a higher risk of a price correction.
A report released this week by TD Bank projected Vancouver and Toronto home prices will probably experience a downturn of about 15% in two to three years, but not the dramatic drop that hit the United States a few years ago.
TORONTO — The Canadian Real Estate Association said Friday that the national home price and sales activity this year will be higher than previously forecast, following a strong spring.
It now forecasts 475,800 homes will be sold in 2012, up 3.8% from 2011, compared with earlier expectations of a gain of 0.3%.
The average home price is forecast to rise by 2.2% to $370,700 in 2012 compared with an earlier expectation that it would fall 1.1%.
“National activity over spring months was stronger than anticipated,” CREA president Wayne Moen said in a statement.
“This shows clearly how the continuation of low interest rates is keeping homeownership affordable and within reach.”
CREA had previously forecast 2012 and 2013 sales volume would be on par with the 10-year average, but it now expects them to be slightly above that.
CREA expects 470,200 sales in 2013, down 1.1% from this year, compared with the earlier forecast of 457,200.
The increased outlook for the year came as CREA reported homes sales last month fell 3.1% compared with April, but remained up from a year ago.
The group said sales volume rose 9% from May 2011, while the Canadian average price slipped marginally to $375,605, down 0.3%.
Continued overall strength in the housing market, largely due to the staying power of low interest rates, has led some economists to warn the market is overvalued.
That could make homeowners vulnerable to a downturn, especially those who have used low interest rates to borrow more than they could otherwise afford.
The Bank of Canada and federal Finance Minister Jim Flaherty have cautioned Canadians repeatedly to moderate borrowing on real estate, declaring household debt to be the domestic economy’s number one enemy.
The bank noted certain segments of the housing market that have a persistent oversupply — such as condos in Toronto — face a higher risk of a price correction.
A report released this week by TD Bank projected Vancouver and Toronto home prices will probably experience a downturn of about 15% in two to three years, but not the dramatic drop that hit the United States a few years ago.
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