OSFI announcement: HELOCs cut to 65%, partial re-qualifying for mortgages at renewal time..

The Office of The Superintendent of Financial Institutions (OSFI) announced some interim changes that will affect all mortgage borrowers and also those with Home Equity Lines of Credit (HELOC).    Draft Bill B-20 was introduced March 19, 2012… and somehow, in less than 3 months, the govt has been able to review the short and long term effects of the biggest changes ever put forward before this country.  Did they work efficiently or did they rush through this?

In the end, we saw 2 major changes announced that will affect all mortgage borrowers….  changes that I feel are completely uncalled for… To be blunt, I haven’t been able to find one piece of data or fact from OSFI or the govt to substantiate their call for change….  Let’s take a look at their changes…by the way, you can click here for the full version from OSFI’s website

1- Re-qualification at Renewal “Current practice regarding residential mortgage renewals has served (Federally-regulated Financial Institutions) FRFIs well.” … “FRFIs, however, will be expected to refresh the borrowers’ credit metrics periodically (not necessarily at renewal) so that FRFIs can effectively evaluate their credit risk.”   as per OSFI text.

Some good news here… I’m glad OSFI isn’t making us fully re-qualify for a mortgage at every renewal period… but obtaining a new credit report at the Lenders discretion should concern you…  If you think it’s all about making your payments on time, guess again… Your overall credit balances, your credit availability, you balances in proportion to your available credit, how recent you obtained credit….. All these things are factored in a mortgage approval decision…. and let’s not forget your credit score… If your credit score goes down or if the Lender changes their policy (we’ve seen that happen many times over the past 4 years), then you could be in jeopardy of not qualifying for a renewal…

Life is never perfect…. we all hit some speed bumps…. the character of a person isn’t measured when times are tough, but rather how they handled that rough patch in their life… If you default on your mortgage, there are existing remedies in place for the Lender to collect their funds…..Do we really need to arm Lenders with a weapon that allows them to cancel or call your mortgage if they think you MIGHT not be able to make future payments??    Are we guilty until proven innocent?  Thumbs down from me on this one…

2- Home Equity Lines of Credit (HELOCs) “…the HELOC component of a mortgage be restricted to a maximum loan-to-value ratio of 65 per cent.  HELOCs are inherently riskier products, given their revolving nature, persistence of debt balances and their ineligibility for mortgage insurance.  However, HELOCs at or below an LTV ratio of 65 per cent will not be required to be amortized….”  as per OSFI text.

We aren’t sure what this means… if you have a HELOC greater than 65% loan to value, will you need to amortized part of it?   The wording in OSFI’s announcement shows me just how out of touch with reality they are….  HELOCs are riskier but they are already much harder to qualify for.  Reality is that arrears or defaults are near all time lows….  Reality is that most HELOC borrowers use them for a large number of things… investments, home renos, business, etc….   The govt has not given us any data to back up their statements about higher risk… and industry stats show we are fine…  It was only a few years ago when CMHC was offering insured HELOCs up to 90% loan to value…?   We’ve gone from 90% to 65%…. Has the pendulum swung too far…?

These changes will come into effect soon…we’ll have to watch for the Final announcement on how they will be implemented…  And because the govt is putting the responsiblity back on the Lenders, we will see different interpretations of these new rules…No two Lenders are alike.

So what’s next, we can’t buy investment properties?   Oh yeah, CMHC stopped insuring rental properties last year…. almost forgot… BIG thumbs down from me on this move.

If you have a mortgage coming up for renewal or have a HELOC and aren’t sure how these changes will affect you, feel free to give me a contact me….

Steve

OSFI’s latest proposals will affect every mortgage and line of credit..

Earlier this week we saw a draft guidelines proposed by Brock Kruger from  The Office of the Superintendent of Financial Institutions.  Yes, more tightening of mortgage and secured real estate lending……  To put this in plain language, the proposal will affect almost everyone… it will change how mortgages and secured lines of credit are offered….. in shorty, I think this plan is trying put out a fire that doesn’t exist.  There is no need for the changes.

Draft B-20 just goes too far…..   they target mortgages but also Home Equity Lines of Credit (HELOC).    Most of the media coverage on this has been somewhat neutral.. but finally we have seen one reporter question these proposed changes.  This article by Peter Foster in the National Post was great…   He questions why we need any more changes when our mortgage and banking system is the envy of the world….  There is no emergency, no arrears problem, nothing to indicate our mortgage lending policies are overly generous.

It should be noted that non-bank lenders will not be affected by this… leaving them as a potential winner if these guidelines become policy…

Here’s a link to the entire 18 page draft.

SUMMARY OF THE PROPOSED CHANGES:

Cash back mortgages could disappear.. currently, one could get a mortgage for 95% of the purchase price at Bank posted rates and then get a 5% cashback.  The cashback can be used as the down payment.  ( I don’t see many reasons for applicants to buy with no money down so this isn’t a big issue for me)

-homes would have to be appraised at renewal timethis is just crazy… can you imagine if your property value dropped and the bank asked you to pay down your mortgage at renewal time or even worse, call in your mortgage?  What’ s OSFI trying to do.. force everyone to take a 10 yer fixed rate mortgage?   They have already made Variable Rate mortgages harder to qualify for…. what’s the matter, they don’t want us to pay less interest?  

HELOC’s would have to be amortized meaning NO MORE INTEREST ONLY PAYMENTS...  this one will affect more households and business owners than the OSFI probably realizes… businesses use their homes to finance businesses… that’s been going on for decades… but they aren’t borrowing with no assets.. remember, they are putting up their homes as collateral.. if we start to make it even more difficult for self-employed to obtain financing, this will affect the economy almost immediately.  But how about the 2nd or 3rd time buyer in their 30’s or 40’s that wants to tap into their equity for investments… ?  Are we going to eliminate all interest only payment facilities?  

-HELOC’s maximum would be reduced from 80% to 65% loan to value of your house…. and let’s not forget that just a few years ago we could have obtained up to 90% loan to value through CMHC insured products. Again, just another crazy idea and very radical change in just a few years… where is OSFI taking us?

mortgages would require tighter debt servicing guidelines including fewer exception approvals by your lender…

Mr. Kruger, your intentions may be honorable, but you are not being practical or realistic.   Why have you introduced these proposals?   To reduce access to credit?   To make it more difficult for Canadians to tap into their home equity?   To make it tougher to buy a house?     Whatever you think these changes might do, I can tell you, as a 22 year mortgage industry veteran and industry insider, that these proposed changes will just shrink our economy, force us to take longer fixed rate products resulting in even higher mortgage penalties for the Banks…  It will force us to tap into our credit cards and unsecured, higher interest credit facilities.… It will force business owners to pay more for raising capital… it will discourage investors….

Give this one a rethink… you are searching for a solution to a problem that doesn’t exist.

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