Gov kills 40 year zero down mortgages
Looks like the Canadian government is starting to heed the US housing market lesson – the Federal Government will no longer guarantee 40 year or zero down mortgages. The new limit will be a 35 year maximum term and a minimum 5% down payment will be required on all new federally guaranteed mortgages.
The federal government will no longer guarantee 40-year or zero-down mortgages in an effort to avoid a housing crisis like the sub-prime mortgage meltdown experienced in the United States.
In an announcement released today, the government said government-backed mortgages would require a minimum down payment of five per cent and a maximum amortization period of 35 years. The borrower would have to have a consistent minimum credit score and there would be new loan documentation standards.
“Today’s announcement marks a responsible and measured approach by the Government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada,” a release issued by the federal Department of Finance said.
The new rules will take effect Oct. 15, 2008 to allow existing mortgage pre-approvals to be used or expire.
So get out there and get your 40 year zero down mortgage while you can, these things are destined to become collectors items! My guess is we’re about to find out how thin of a speculative margin has been driving the Vancouver real estate boom.
July 11th, 2008 at 6:17 pm
…oh does anyone not seriously believe that the recent changes to Canadian government guarantees aren't related to the very high probably event that the big mortgage guarantors in the US are on the ropes with blood streaming down and ready to go down?
Come one bulls, let's hear it so you have your lines ready for tomrrow's exhibition centre tours.
July 11th, 2008 at 6:11 pm
Good job again Pope on selecting your articles. I hadn't thought about it, but come to think of it, now RRSPs are safer than your house!
You don't have to put stocks in your RRSP; you just put GICs, T-bills etc.
Unfortunately, some poor soles will rush in to "get under the wire" over the next few weeks before the 40 year rules change, mindless of the implosion that is so obviously happening to our biggest trading partner.
Thank goodness we have the seawall to protect us.
July 11th, 2008 at 11:18 am
The Sophia would be way more interesting at 50% off and one of Krrrrrrish's mom's "extra double happy ending gorilla mask" massages.
Hey krrish, tell your mom I'll be by to see here this weekend!
I think maybe she was huffing fumes from her "exotique lotions" when she was expecting krrrrish, which nicely explains his mental capacity.
July 10th, 2008 at 10:56 pm
The Sophia will be more interesting at 50% off than it is at 5% off.
July 10th, 2008 at 10:47 pm
I see the advert in today's Georgia Straight for the Sophia development now has a 5% price discount. Last week's advert just emphasized what a great deal this bankrupt development was – obviously not enough investors could see this no-lose opportunity.
July 10th, 2008 at 10:21 pm
Wow….a jump in inventory to 19,251, increase of 232 in one day. Sales-to-list at a mere 24%.
July 10th, 2008 at 9:37 pm
absolutely, this is a publicity stunt by the feds/cmhc. the cmhc is not like any other quasi insurance gig; it is an unprecedented cash cow for the federal government. people don't realize how closely the cmhc is linked to the bank of canada. money in (there's been a lot) is pure revenue, any liabilities are easily monetized by the central bank. a no lose proposition for the government. the government doesn't want the cmhc to come under scrutiny, ergo the distancing created by the new announcement.
July 10th, 2008 at 9:36 pm
Too good to be true…………….
From San Diego tonight
"Sales of North County homes priced $1.5 million or more crashed by 50 percent in June from the same month a year earlier.”
July 10th, 2008 at 8:39 pm
I think the whole 40 year 0 down was just a dodge from the Conservatives in the first place, they figured there would be an election in the spring at the latest so they had to keep the bubble going until after then.
Now that it's obvious the bubble is going to die before the next election they cut back as you say beatstreet so they can say they did something…
July 10th, 2008 at 8:32 pm
Great video link! Well-explained, and goes a long way to demonstrating how ridiculous people's reasoning can get when money is involved.
In that vein, here's another take on the concept:
http://www.geekculture.com/joyoftech/joyarchives/…
July 10th, 2008 at 8:27 pm
garth turner says “This pulls the plug right out of the bubble, but it does it in a way that inflates the bubble another few months,”
i wonder if it will…
This will prompt a few greatest fools to jump into the market, but for every one of them there will be ten speculators trying to get out.
Prices are already going down and they will keep going down.
July 10th, 2008 at 6:41 pm
Scoop,
Thanks for the link
July 10th, 2008 at 6:32 pm
BDK,
Thanks for the direction now it's easy to reach there to watch the construction process.
July 10th, 2008 at 6:28 pm
From the backgrounder at:
http://www.fin.gc.ca/news08/data/08-051_1e.html
"The initiative also includes minimum loan documentation standards to ensure that there is evidence of reasonableness of property value and of the borrower’s sources and level of income."
Reasonableness of property value, good luck with that! (I know this means reasonableness as compared to market value but it struck me as funny)
Seriously though, does this mean though that there were no loan doc standards prior to this?
July 10th, 2008 at 6:28 pm
This is more incompetence from Flaherty. First they approve 40 year mortgages; now with an election surely on the horizon he wants to give the bubble one last blow. But, if it tanks in the fall he will say he did something….so cynical. Disgusting.
July 10th, 2008 at 5:18 pm
Betamax, based on the recent slow sales trend, it should be bone dry.
I am surprised how “ the dogs” and the pimps, are trying to deny what the government has officially admitted by virtue of taking this step, it is actually saying "yep, it's a bubble and our loose lending standards have caused it, but unlike the bad Americans, we won't deny it until there is blood in the streets"
Pathetic
July 10th, 2008 at 5:03 pm
If this doesn’t spur sales in the short term, it will be an indicator how dry the well of greater fools really is.
Agree, and I suspect it is bone dry at this point.
July 10th, 2008 at 4:54 pm
The key thing to remember is TV Towers will go down in price at least 50% in the next 12 months. It is right near the worst corner of downtown (Dunsmir and Seymour) and too close to the downtown eastside, it's also the bad part of robson where there are a lot of drunk people from surrey causing trouble on weekends
July 10th, 2008 at 4:49 pm
^Income1 Monthly Payment2 is an issue not the down payment3 alone^
Garth Turner is a brain less old man-how on the earth some one will buy million dollar house?Even five hundred thousands? or two hundred thousands appartment? because what is zero down under 20% is a government and private bussiness."the issue for buyers is how to pay your monthly payment that will decide the buyers fate not the down payment" no buyers can be qualified unless they are able to pay monthly payment from their supporting income.
It's been more than two year since negative headlines regarding housing sector does not match with article inside
now it's ctv found this idiot has more value who recently purchased pent house on 36th floor in vancouver man oh man,who bought his book called"Greater Fool"Isn't that apposite of "SMART BUYERS" Garth is in opposition-greater fool got kicked out from his parent party earlier-no?.
July 10th, 2008 at 4:38 pm
I hadn't considered that this move would spur a short term buying spree. That would truly take the greatest fool of all, the one that sees the US example, looks at the local market data and leaps in anyways just as the last blast of air is pumped into the bubble. I guess there always has to be someone who buys at the peak!
July 10th, 2008 at 4:29 pm
One of the overused talking points made by the Re pimps was that BC’s high housing prices were supported by fundamentals such as a strong economy, and of course also the rich foreigners, and not by cheap money.
We will soon see, although, a 35 year mortgages and 5% down is still lax.
If this doesn't spur sales in the short term, it will be an indicator how dry the well of greater fools really is.
Believe or not in my circle the believers were expecting a 100 year mortgage to be introduced in Canada. They reasoned that would be the only way those who were priced out would be able to afford a home, yes the popping of the bubble was not a possibility-not in "the best place on earth, where the Olympics are coming
July 10th, 2008 at 3:58 pm
ctv thinks cracks in housing market behind new mortgage rules.
garth turner says "This pulls the plug right out of the bubble, but it does it in a way that inflates the bubble another few months,"
i wonder if it will… or will everyone hold back?
July 10th, 2008 at 12:53 pm
Oh goody, they're discussing this issue on CBC radio with a mortgage broker. She said the economy here in BC is very strong, incomes going up, population going up, no need to worry about prices going down! Oh boy I'd better call the bank and get pre-approved!
Garbage like this sure makes you feel like crap eh? Better change my name to pricedoutforever.
July 10th, 2008 at 12:50 pm
Buying a home is a good long term investment if you,
1, Pay down the debt in a quick and timely fashion (interest is the killer deal, so short amortization period is best.
2, Use a conventional mortgage, which means a 20% or more downpayment. The more the better, ofcourse your commitment to your property increases too! Like they say, SHOW ME THE MONEY!
3, Low loan to value ratio. Simply means, pay at market fundamental prices with a huge downpayment and your mortgage and AMS period will be lower as well.
4, Mortgage+expenses+insurance are lower than your typical rent paid out.
5, Location,location, location. Sometimes, your dream home is situated at a location you like, no other home has that same plot as yours. Which means, somebody else will realize this value potential in the near future too!
Unfortunately, you may have to pay over a bit even during a downturn. It's like buying a bluechip company. They may be down, but they still command a price. Whereas small cap companies may drop even further..
All in all, buying a home in Vancouver is a good long term investment if you buy into it prudently.
July 10th, 2008 at 12:44 pm
@foo The banks have been securitizing the mortgages they issue as fast as they issue them.
How are these securities held, who has rated them, and who are the 'ultimate' bag holders? Sorry, but my knowledge of Canadian banking is limited.
July 10th, 2008 at 12:37 pm
But the majority of first-time buyers were using 40 year, which is what matters.
Whether people with existing properties stay put or sell and buy another makes little difference to the market.
Patriotz,
I think you are confusing first-time buyers with RE investors. While first time buyers did opt for the 40 AMS with zero down, their numbers aren't huge. I think the total percentage overall for all subprime time borrowers in Canada is under 4%, something less than 3% in the US.
What's true and I suspect that most of these loans go out to are people who siphoned off equity from their principal residence, went out and bought multiple units for investment or rental income purposes. The fact of the matter is, the government is worried that rampant borrowing to speculate on this asset class may lead to greater government liability. And besides, any mortgage with less than 20% downpayment requires CMHC insurance. You got to ask the question. How many of those condo units are paid down with 20% or more in downpayment.
The problem with price reduction is that, price doesn't have to go down to 20% for a person to loose all of his downpayment. If he or she has a 7% mortgage plus other expenses, it only takes about a 10 to 13% price reduction to put the person in question into negative equity. And for those who uses zero down or even a 5% downpayment, negative equity for them has already come and gone. They are negative, but it's just a matter of how bad prices can keep going down before they decide that walking away and financing the difference or even declaring themselves bankrupt would be a better choice. Judging from the reaction from our Federal Government with its 35/5 policy implementation, it really means that price reduction will become a reality. They too can do the math as well as any other savvy investor.
July 10th, 2008 at 12:34 pm
@foo
Thanks foo!
Better hope you don’t have any REITs in your RRSP…
I did in the 'good' years!
July 10th, 2008 at 12:31 pm
@Drachen a lot of people in Vancouver purchased second or third properties as “investments”.
And they'll loose just as much money whether they had 40 year or 25 year mortgages.
July 10th, 2008 at 12:25 pm
Alistair Cookie,
The govt explicitly backs CMHC and the other insurers. Their capitalization levels are irrelevant. This is not the US with an implied guarantee on FNM/FRE. We the taxpayers are on the hook for 100% of losses on insured mortgages.
You can also take a look at the big banks' mortgage portfolios over the last 5 years, and you will see that they have barely grown. The banks have been securitizing the mortgages they issue as fast as they issue them. Better hope you don't have any REITs in your RRSP…
July 10th, 2008 at 12:06 pm
@patriotz the banks don’t really care about the equity situation on insured mortgages because CMHC is holding the bag, not them. The insurance is good for the entire amortization period.
Sorry to revisit this but… we are seeing some interesting goings on south of the border with many insurance companies close to failure: ABK, MBI, FNM, FRE to name the big ones.
So how well capitalized is CMHC? and will the government/taxpayers really back up it's failure? I think that things have changed or will be changing, and banks may end up holding the bag. But I may be wrong.
July 10th, 2008 at 11:55 am
That's not entirely true Patriotz, a lot of people in Vancouver purchased second or third properties as "investments".
July 10th, 2008 at 11:40 am
. So really and like the US Subprime, it’s really a very low percentage when it comes to the overall mortgage scene
But the majority of first-time buyers were using 40 year, which is what matters.
Whether people with existing properties stay put or sell and buy another makes little difference to the market.
July 10th, 2008 at 10:57 am
Prices are so cheap here in Vancouver that no one needs to use a 40 year amortization anyway. Hefty downpayments and small amortization periods are what have been keeping the Vancouver market going with such force. This announcement will hit communities like Calgary and Saskatoon where irresponsible young buyers with no money have been buying homes. Here in Vancouver, the best place on earth, future home to the 2010 Olympics everyone has been very conservative. Add in the asian and albertan investors and you have a strong market.
July 10th, 2008 at 10:52 am
bcubbins,
congratulations!you have also got an answer to your own question at #54 through your own link.
Question:But I thought the private insurers introduced 0/40 mortgages before CMHC, so why would they have to stop??
Answer:government backs the insurance whether it is provided through the Canada Mortgage and Housing Corp. or private insurers, such as Genworth Financial.
July 10th, 2008 at 9:53 am
More from the same article…
Feisal Panjwani, a senior mortgage consultant with Invis in Cloverdale estimates that 85 to 90 per cent of his first-time buyers have chosen the 40-year option.
But most could qualify for a shorter term, he said. Instead they pick a 40-year period with lower payments so they have the flexibility to pay more than required but go back to the lower amount if they hit a rough patch, he said.
So the effect of shortening the amortization period may not be so bad. But taking away the zero-down option could have an effect on the market, he said.
"That zero-down program has been quite popular," Panjwani said.
July 10th, 2008 at 9:50 am
Today's Sun has an expanded article that answers my question…
Credit squeeze hits 40-year mortgages
All mortgages issued by federally regulated lenders with down payments of less than 20 per cent require insurance, and the government backs the insurance whether it is provided through the Canada Mortgage and Housing Corp. or private insurers, such as Genworth Financial.
So most low-down-payment mortgages will be affected, said Tsur Somerville…
July 10th, 2008 at 9:45 am
MSM gets it!
http://tinyurl.com/goingdown
oh happy day!
July 10th, 2008 at 9:36 am
It’s my understanding from other posts that due to CMHC backstopping of private insurers, they are also precluded from insuring 0%/40y.
—–
Patriotz, I don't know much about this mortgage insurance market so maybe you could expand on your comment. But I thought the private insurers introduced 0/40 mortgages before CMHC, so why would they have to stop??
July 10th, 2008 at 9:24 am
Sub-prime is used to distract people from the fundamental problems with real estate prices throughout the world.
July 10th, 2008 at 9:07 am
The people in control of the market are not stupid
Of course they are. No need to assume malice when incompetence will do.
July 10th, 2008 at 8:57 am
Cam Muir is on CKNW with Bill Good right now. Lots of callers are questioning Muir's statements of "no sub prime here". All of the sudden people are coming out of the woodwork saying that our problems are similar to US Sub Prime, long denied by Muir and people like him.
Somebody asked him point blank if it is a good time to buy, and his typical "its always a good time to buy long term" is still alive and well.
Spin spin spin!