New Rules - Same Concerns
2020-06-08 | 10:41:49
Happy Monday everyone!!
Hope everyone enjoyed the beautiful weather we had here in the Toronto area.
As we begin looking forward to the new week ahead, I imagine the news story that captured all of us in the mortgage financing and real estate world will continue to reveal battling perspectives from last Thursday’s decision made by CMHC to tighten underwriting policies for insured mortgages.
Here are some of the features of what constitutes an “insured mortgage”:
- Contributing less than a 20% down payment on the purchase of their home.
- The value of the home is less than $1million dollars
- The amortization period for the mortgage does not exceed 25 years.
- The property be owner-occupied
- The mortgage is not a refinance deal
- The borrower must have a minimum credit score of 600 (for the best rates, borrower scores range from 680+)
- The borrower have a gross debt service ratio (GDS) of 35-39% or less
- The borrower have a total debt service ratio (TDS) of 42-44% or less
- The borrower prove they can afford their payment at the benchmark posted 5 year rate published by the Bank of Canada or, today’s stress test of 4.94%
Here below are the highlights of that decision brought to us by CEO, Evan Siddall, of CMHC that take effect beginning this coming July 1:
- The gross debt service ratio is now fixed at 35%
- The total debt service is now fixed at 42%
- The minimum credit score is now fixed at 680 for at least one borrower on a deal
- Banned are non-traditional sources of down payments (ie, Lines of Credit, credit cards, etc) that will “increase indebtedness”
A statement made by CMHC that followed their decision states:
“These actions will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
According to RateSpy, the CMHC changes will effectively reduce homebuyer’s purchasing power by 10.9%.
Someone earning $60,000 with no other debt and 5% down under CMHC’s new guidelines is tantamount to increasing the stress test from today’s 4.94% to 6.30%.
Reading the above, one will imagine that again, CMHC is quivering in the boots of all Canadians and that they are concerned about the debt Canadians are carrying.
The fact is, insured borrowers currently account for less than 20% of new mortgages.
Changing the debt service ratios will certainly keep or remove many buyers out from pursuing their dream of homeownership.
Reaction to the upcoming changes and decision of CMHC were quick to follow. Paul Taylor, CEO of Mortgage Professionals Canada said:
“I think the changes are well-intentioned, but poorly timed. I understand the rationale, but the people most at risk of default are already in their first home and insured. Disqualifying purchasers now won’t improve the quality of the portfolio already at risk.”
Mr Taylor went on to say:
“If house prices do soften, from a public policy perspective, that’s precisely the time to bolster support for first time buyers. Making homes more difficult to finance will, once again, reserve properties for purchase by the already well-capitalized.”
Not long ago, all of us in mortgage financing were bracing and cringing at the thought that the 5% minimum down payment would be replaced by a 10% minimum down payment because of fears of home prices dropping by, what ONLY CMHC believes to be, at 9 to 18% over the next 12 months.
But this is a problem only if we truly believe that property values will not see any increases post COVID-19 and beyond. This is hard to imagine and the result of values remaining depressed over an extended period - say years - will be much more devastating to the Canadian economy and to those who currently are homeowners.
I have always been a firm believer that homeownership is a right that we all possess and should strive to achieve.
On its face, it appears that CMHC’s Evan Siddall focuses on keeping people from becoming homeowners to protect people from themselves.
But wait, some of the underwriting measures now being implemented by CMHC, I believe, are prudent when evaluating the capacity and credit worthiness of buyers.
The next move will come from CMHC’s competitors – Genworth and Canada Guaranty. If they don’t lower the debt ratio limits to what CMHC is implementing, the credit score limit of 680 (for at least one borrower on the application) may be the deciding factor regardless of the other guidelines taking effect on July 1. For those borrowers, any down payment less than 20% will keep them out of the homeowners club.
It will be interesting to see how the real estate market will react.
Will there be a rush for people to go get their applications in by July 1st, before the new guidelines will prevent them from purchasing their home due to their current situation? I imagine so.
I believe there is an enormous responsibility for would be homeowners to educate themselves with a team of professionals that dutifully outline the budget necessary to purchase the home they want, along with foreseeable and unforeseeable expenses that need to be considered before making final decisions that can impact the lives of everyone in their care.
My thought for the moment is to not bash CMHC - or Genworth and Canada Guaranty if they adopt the stricter underwriting policies for insured mortgages. As of today, Genworth plans not to change its underwriting policy.
Keeping and safeguarding a good credit score; saving for a down payment from ones own funds rather than increasing debt someplace else for a down payment is also sound advice for those buying a home.
The debt service ratios will have the biggest impact on people’s ability to purchase.
Those whom are purchasing pre construction under $1 million dollars are already faced with deposit structures of 3 to 4 installments of 5% of the purchase price plus, the builder requiring an early pre approval indicating the purchaser’s ability to finance the property being sought.
As such, though the changes may appear to be drastic, I also believe that many in the mortgage financing scene are adding soft language in support of would be homebuyers for a process that is and will remain very hard for numerous people in our society. Especially those waiting and wishing to own their own home.
We need to be building more affordable housing whereby one’s debt service ratios will allow people with lower paying jobs to positively believe that their saving for a down payment amount will result in the purchase of a home somewhere within the boundaries of where they currently live.
We need to have lenders who are also more concerned about how they simply issue credit. This will assist people to live within their means and protect their highly weighted credit score.
As always, I welcome anyone, borrowers and realtors alike, to reach out to discuss the new changes coming and how these stricter guidelines will affect your purchasing power and, those of your clients.
Wishing you all a great week ahead,
Marco
