Category Archives: Canada

The new lending guidelines

Those new OSFI guidelines for CMHC mortgages are still ‘coming soon’, but the Vancouver Sun has an article up outlining the current state of the guidelines and predicting they will be announced in the next few weeks.

They’ve softened some since the first concepts floated out there by OSFI, but as a batch of changes that occur all at once they still stand to have a marked impact on the market.

Here’s the list of predicted new guidelines:

. Home Equity Line of Credit mortgages reduced from 80-per-cent financing to 65-per-cent financing.

. Lines of credit to be either amortized, or amortized after a specified period of time (no more never-never plans).

. More stringent income requirements for self-employed borrowers.

. All mortgages to be reviewed upon renewal (currently as long as payments are made, it is unlikely for a bank not to offer a renewal to a client).

. Funds from cashback mort-gages are not allowed as a source of down payment (currently only a handful of lenders allow this, but it does mean that “zero down” mortgages are technically avail-able, but with some restrictions.)

. Use of the five-year posted “benchmark” to qualify uninsured terms of one to four years and all variable terms (currently most lenders use a three-year posted or a lower rate to qualify uninsured mortgage.)

. More limits on underwriting exceptions (many recent applications don’t fit the ever shrinking “boxes” with the banks, which means fewer common-sense deals will get approved.)

. Home insurance to be included in debt-servicing ratios (it is currently not included.)

. More public disclosure of statistics pertaining to institutions’ mortgage practices.

. More accountability from management to ensure lenders are adhering to their underwriting guidelines.

If these changes are implemented I guess we’re going to find out how much of our real estate market is supported by those who are stretching beyond their means.

One bubble down, one to go

The Vancouver real estate slow down is making news all over and people are now wringing their hands over Toronto.

This Financial Post article talks about our bloating inventory and collapsing sales while pointing out that Toronto sales are up 11% year over year.

..and yes, there’s yet another warning from the Bank of Canada:

“Although economic growth in Canada was slightly slower than expected in the first quarter, underlying economic momentum appears largely consistent with expectations. However, the composition of growth is less balanced. In particular, housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth.”

The warning is apt. Rosenberg said if the Bank of Canada felt the need to re-establish parity between short-term rates and its inflation target it would have to raise the rate 100 basis points.

“That wouldn’t cause a recession, but it sure would be painful for many households,” leading to more loan defaults and less spending growth.

If you can’t afford a 100 basis point increase in rates you probably shouldn’t be taking on too much debt.

Heloc LTV going to 65%?

Canadian Mortgage Trends is saying that changes to HELOC loan to value (LTV) limits are a done deal.

If so this means the maximum HELOC you’ll be able will move from 80% to 65% of the total value of the property.

Read the original link for full details. Many commenters there seem to think this is too big a move.

Appraiser said…
65% is too much of a leap all at once.

I can’t understand why OSFI doesn’t ratchet the LTV ratio down a little more slowly (i.e., 5% at at a time and sit back to observe the consequences).

As has been noted lately, the previous three sets of mortgage tightening guidelines have been gradually working their way through the credit markets effectively.

You can kill an ant with a hand grenade, but it usually makes a hell of a mess.

Days of ultra-cheap money coming to an end

..At least that’s what Mark Carney and other Bank of Canada officials have said according to this article, yet they’re refraining from being more specific.

Meanwhile the Organization for Economic and Co-operative Development (OECD) is urging Canada to start raising interest rates in the fall and keep on raising them to stop an inflating housing bubble and reign in inflation.

The OECD, a high-powered economic research group backed by contributions from its 34 rich country members, offers a scenario: An increase in the benchmark rate of a quarter of a percentage point in the autumn, and similar increases each quarter through to the end of next year, leaving the benchmark overnight target at 2.25 per cent.

That still would be low by historical standards, yet, according to the OECD, likely a big enough increase to cause prospective homeowners to think twice before buying at current inflated prices. However, the OECD’s recommendation comes with a risk.

The Federal Reserve Board has made a conditional pledge to leave U.S. rates extremely low until the end of 2014. Following the OECD’s path could create an unprecedented spread between Canadian and U.S. interest rates, which would put upward pressure on a Canadian dollar that many say already is too strong.

Oh, and the OECD made this same recommendation a year ago and was ignored. So I wonder how Carney intends to bring the days of ultra-cheap money to an end?