Proposed Mortgage Rule Changes

Proposed Mortgage Rule Changes

Lately there has been a lot of news about mortgages.  I thought I should spend some time talking about what it is that they are talking about in the news mostly.  Recently Flaherty (Finance Minister) along with OFSI (Office of the Superintendent of Financial Institutions) felt there should be further restrictions on residential mortgage underwriting practices and procedures.  In short what that means is he plans to restrict CMHC (Canada Mortgage and Housing Corporation).  In this article I will explain a bunch of the proposed changes and the repercussions as I see them.  I just feel there are a lot of different stories out there and it has all become a bit confusing.  The document I will be referencing is called “Draft Guideline B-20”.  This named document outlines the changes proposed.  The proposed changes are not the initiative of the banks or other lenders but the Finance Minister, Flaherty.

The first change is called “Loan Documentation”.  In this they (OFSI) is recommending that loan documentation and underwriting occur as applicable for each subsequent renewal or refinancing of the mortgage.  Basically what they are saying is that although you may have paid your mortgage as agreed (never missed a payment), it is recommended that you re-qualify for the renewal of your mortgage when the term is up. You would be qualified on the same criteria as if it were a new mortgage.  You would need to verify your income and credit all over again.   What that means is that if you have picked up a little too much debt or have lowered you credit score or took a pay cut at work within the term there is a possibility they (your lender) won’t renew your mortgage therefore leaving you in a really challenging spot.  If your existing mortgage lender won’t renew what options will be available?  It is possible you won’t qualify with another lender either.  Ultimately there would be a lot of people forced into foreclosure and loss of their house.  My opinion, that is not good for anybody.   

Another proposed change has been called “Debt Service Charge- Additional Assessment Criteria”.  On this one it is recommended borrowers income and repayment capacity in retirement is taken in to consideration.  As it is, it is tough enough to accurately assess where someone will be 2-3 years from now let alone where they will be at retirement.  This is virtually impossible to determine.  How can you determine a borrower’s career path?  This change in my opinion will eliminate a lot of potential homebuyers which will ultimately have a negative impact on the housing market. 

OFSI has proposed a change to “Loan to Value (LTV) Ratio”.  What this means is they are seeking to reduce the maximum amount that can be borrowed by a non-conforming borrower.   It would reduce maximum loan to value from 80% down to 65%.  A non – conforming borrower would be somebody who is self-employed and cannot verify enough income to get a mortgage approved through mainstream products.  If OFSI is successful in their efforts here it could result in the loss of some lenders as well these clients will wind up going to the private market for such products and will wind up having to pay a lot more for a mortgage.   This again, would be a very negative change in my opinion. 

The next change OFSI has indicated they would like to see changed is called “Down Payment”.  Basically, in this they are attempting to rid the market place of products which allow people to purchase homes with zero down payments.  These mortgages are called Cash-Back mortgages and allow the purchasers to borrow up to 5% of the purchase price for the down – payment.  I don’t feel that this change would be very significant as most people don’t want to pay the higher rates associated with this product.  It is unclear as to whether or not OFSI is looking to include flex down mortgages at this time.  Flex Down mortgages allow potential home buyers to borrow money from a line of credit from the bank.  This rule change would not affect borrows with a traditional down payment of 5%. 

The last of the proposed changes would be “Home Equity Lines of Credit (HELOCs).  Currently if you are to get a home equity line of credit you will likely be able to get up to 80%, and in some cases 75% loan to value.  If the change is approved it would see this reduced to 65% loan to value.  It is also recommends that there are restrictions to “interest only” HELOC products which will see borrowers required to pay down the principal in their minimum monthly payment.  With this proposed change I am on the fence.  I agree that there should be restrictions on this product ensuring borrowers to repay some of the principal.  I think when these are used by the right people they can be a really effective tool.  A lot of times these are used for purchasing investments, business expenses and property purchases.  It would not be fair to the people using them properly to restrict them from what it is today. 

The above is my take on the proposed changes and some of their possible outcomes.  While I feel some of these changes would have a very negative impact on the housing market, some of them might be ok.    There is an organization in Canada who speaks to these issues on behalf of the Mortgage industry.  The majority of Mortgage companies in Canada are in some way members.  The organization is called CAAMP (The Canadian Association of Accredited Mortgage Professionals).  CAAMP is working towards an amicable solution to all of the proposed changes.  Their recommendations in my opinion will be the best for the business and the consumers.  If you would like further information please go the following link.  http://bit.ly/IAJyfN.   The link takes you to an article written by CAAMP, Response to Draft Guideline B-20, Residential Mortgage Underwriting Practices and Procedures.