Hot topics this week are all the govt changes to mortgage lending… but before we get into the bad news, I thought I’d start with some positive news… Interest rates are still at all time lows…. if you have a mortgage or will be getting one soon, today’s rates are lower than ever before… That means more money in your pocket! We don’t seem to hear enough about that…
Okay, now for the update…Remember, these changes will affect ALL Federally regulated financial institutions….BUT they won’t affect MOST CREDIT UNIONS and other Lenders..
Yesterday we got a double whammy… First the Federal Department of Finance announced changes to CMHC insured mortgages.… And later that day, OSFI announced Part 2 of their changes to Residential Mortgage Underwriting Practices and Procedures, better known as RMUP… but I prefer RUMP because that’s exactly where most of us will be feeling the effects of these changes…
The timing of all this tightening puzzles most of us in the mortgage industry. Canada has been the envy of the world when it comes to our mortgage underwriting practices… The govt seems to be getting more into credit underwriting and procedures than ever before… And yet they have not given us any true data or reason for these changes….
Nevertheless, it’s important to keep up to date as these changes will affect us all. Part 1 of changes were announced earlier this month through a Draft update on June 6th.. And here are the details of the final changes which come into effect later this year… there is a lot of text in the final draft but we are only focusing on the changes that will have the greatest impact on us:
- Credit checks should be done more often.. minimum credit scores should not solely relied up to determine a borrower’s credit worthiness.
- Home Equity Lines of Credit will be limited to 65% loan to value, down from the current 80% loan to value. (still not sure if there will be any grandfathering of existing lines but my guess is no)
- there is more wording with regards to Lender’s Senior Management having more minimum reporting… (this looked like make-work stuff to me as most Lenders have tons of reporting).
- Cash-back mortgages are gone (no big deal here…. very few of these products were ever used by us ‘irresponsible Canadians’… )
- Self-employed individuals will be required to provide and pass an ‘income reasonability’ test… (these already exist with most Lenders)
- Lenders should use the 5 yr fixed contract rate or the Bank Posted rate when qualifying for Variable rate products…even conventional mortgages… (again, nothing new here.. most Lenders are doing this already….yawn)
Who can blame you if you if you’re having trouble keeping up with all these changes to mortgage rules and lending policies. We must question the purpose of these changes… little to no proof has been presented with regards to why the govt feels these changes are needed… and the timing may come back to bite them in the RUMP! Some experts are making the argument that the govt’s attempt to avert a major housing downturn, could actually be the cause of it…..let’s hope not.. only time will tell.
I question why the govt is so focused on the estimated $1trillion residential mortgage market, when we have little or no rules when it comes to the other $500billion of non-real estate debt such as credit cards, loans and lines of credit. Why is it okay to buy a car with $0 money down or okay to make NO payments for 6 months or 1 year, with interest rates of 8%, 18% and 28%, but if you want to buy or refinance your home, you better be prepared to jump through several hoops? Can you say, ‘I need to refocus my energy and efforts’?
THE GOOD NEWS
Mortgage Brokers will be much busier with these new changes. Your traditional Bank and ‘A’ Lender WILL NOT be able to provide the same financing as before…. BUT there are several other Lenders that are ready to fill the gap… including Credit Unions and other non-bank Lenders….. We could see the small Lenders grow with these changes… As always, feel free to contact me if you have any questions or need clarification.