CMHC Limits refi's to 80%

 

 

 

 

At 8:15 am Finance Minister, Jim Flaherty has announced four changes to mortgage insurance rules.

·         Maximum Amortizations go to 25 yrs;

• mortgage insurance for properties over $1 million;
•  Refinancings reduced to 80%
• TDS and GDS  at 44 and 39%

http://www.theglobeandmail.com/report-on-business/ottawa-tightening-mortgage-rules-no-more-30-year-amortizations/article4358876/

Effective date for these changes will be July 9^th 2012.

The Maximum 80% refinances is by far the most significant change that will affect most Canadian Homeowners.

 

CMHC has officially stepped out of the mortgage refinance business.

 

Looks like CMHC is only in it for Purchases at the moment.

 

Yet to be announced is whether Genworth or Canada Guaranty, the 2 privately run mortgage insurance companies will follow suit.   Genworth has already once in the past not followed CMHC’s policies changes with maintaining the previous stated income policy.   So they might not necessarily follow this move.  I am sure an announcement will follow shortly.

 

OSFI is also coming out with their announcement later today, word on the street is the qualifying renewals is off the table, but the Lines of Credit limits being reduced to 65% is likely to be implemented.  I will send an email once they are announced.

 

If this is not enough changes to consider I have one more, First Line Mortgages, previously one of the largest lenders used by Mortgage Brokers is closing their doors effective July 1 2012.

 

It’s never good when we lose a lender, as it takes options away from clients, and reduces competition in the Market place. 

 

Any commitments made by First Line will remain in place and will close, but as of July 1 2012 no new business will be accepted.

 

 

There you have it, possibly one of the busiest days in our mortgage world.

 

Throughout all of this, rates have remained unchanged at the moment, but we are waiting for the bond market’s ration to these changes to see what pressure will be put on rates.   

 

Thanks,
 
David Kendall
 
Mortgage Agent
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Eric Lam, National Post
Thursday, Jun. 21, 2012

The federal government is taking another stab at getting Canadians to rein in their borrowing and spending, introducing new mortgage restrictions Thursday to cool the housing market.

The tighter rules, which include lowering the maximum amortization period on mortgages to 25 years from 30 years, lowering the maximum amount of refinancing to 80% from 85%, capping the maximum debt ratios for households and limiting government insurance to mortgages of less than $1-million, will come into effect on July 9.

“The adjustments we are making today will help [households] realize their goals, build on the previous measures we have introduced to keep the housing market strong, and help to ensure households do not become overextended,” Jim Flaherty, federal minister of finance, said in a release Thursday.

Here’s a look at how economists are evaluating the moves and their implications for the slowly recovering Canadian economy:

Derek Holt and Dov Zigler, economists, Scotia Capital

Home sales will accelerate very briefly over the next couple of weeks before the July 9th implementation period. We are more convinced of our view that the BoC is on hold until mid-2013 and with fatter tail risk in favour of a longer hold. Our bias is that strong cumulative regulatory tightening pushes out rate hikes, supports a buy-Canada-bond bias, poses downside risks to CAD, and will materially soften growth in housing, consumer spending, jobs, and add to already evident slowing in credit growth.

Robert Kavcic, economist, BMO Capital Markets

The reduction to a 25-year from 30-year period is equivalent to about a 0.9 ppt mortgage rate increase (assuming a 3.3% 5-year fixed rate and a $290k mortgage after 20% down on an average-priced $363k home). Notably, the impact is bigger than the switch from 35- to 30-year mortgages, which at current mortgage rates, would be equivalent to about 0.6 ppts of tightening. It’s also important to keep in mind that the amortization change won’t impact affordability across the entire market, but ra ther those that would be taking a 30-year amortization—according to the Canadian Association of Accredited Mortgage Professionals, that made up 40% of mortgages for purchase during 2011/12 (up to May).

Jennifer Lee, senior economist, BMO Capital Markets

April doesn’t look like a good month for the Canadian economy. The news that Canada would be tightening rules for government-insured mortgages (cutting the max amortization period from 30 years to 25 years), is an attempt to cool the housing market (FM Flaherty says they need to calm particularly the condo market in a few Canadian cities) and to slow the run-up in household debt that the Bank of Canada has been warning about to just about everyone. And so far, consumers are heeding the warnings. Canadian retail sales unexpectedly fell 0.5% in April, worse than the consensus view for a 0.3% gain, and our call of a 0.1% rise. It looks like GDP for April is coming in at a modest +0.1%, or flattish. In other words, the economy struggled to post any growth in April.

Tim Hockey, chief executive, TD Canada Trust

Canadian household debt levels have reached levels that raise concern. Today’s decisions by Minister Flaherty to move to a 25 year maximum amortization, as well as actions taken by OSFI, take direct aim at the issue and they should have a substantial moderating effect on the growth of Canadians’ debt levels.

Craig Alexander, chief economist, TD Economics

We view the changes announced today as a prudent decision to address the increasing risks from consumer debt growth. The regulatory action helps to take pressure off the Bank of Canada. The rapid personal debt growth in recent years has been fuelled by strong real estate markets in a sustained, incredibly low interest rate environment. Since the imbalance is concentrated in real estate, monetary policy would be a blunt tool to address the concern. Tighter regulations could target the risk more directly .

It should be noted that the tightening of the mortgage insurance rules is coming amid stricter guidance from OSFI, the chartered bank regulator, which includes limiting Home Equity Lines of Credit (HELOCs) to a maximum loan-to-value of 65% and imposing more restrictive equity lending criteria. Together, the new mortgage insurance rules and the more constrained supply of credit should go a long way in addressing the risks from personal debt and overvaluation in real estate.

 

Tighter Mortgage Insurance Rules to Temper Personal Debt Growth and Cool Real Estate

 

TD Economics

 

Data Release: Tighter Mortgage Insurance Rules to Temper Personal Debt Growth and Cool Real Estate

 

• In a surprise move, the Government of Canada announced today that it was tightening mortgage insurance rules for the fourth time in four years.  In total, four new measures were announced for new government‑backed insured mortgages. 
• The maximum amortization period was lowered from 30 years to 25 years.
• The maximum amount that Canadians can borrow when refinancing their homes was lowered to 80% from 85% of the value of their homes.
• Households are now being constrained to a maximum gross debt service ratio and maximum total debt service ratios of 39% and 44%, respectively.
• Government-backed insured mortgages will now be only available on homes with a purchase price of less than $1 million.
• These new rules will take effect on July 9, 2012.

 

Key Implications

• We view the changes announced today as a prudent decision to address the increasing risks from consumer debt growth
• The regulatory action helps to take pressure off the Bank of Canada.  The rapid personal debt growth in recent years has been fuelled by strong real estate markets in a sustained, incredibly low interest rate environment.  The Bank of Canada acknowledged in the Financial System Review report that household indebtedness is "the most important domestic risk to financial stability in Canada." This situation created a challenge for the conduct of monetary policy. On the other hand, the outlook for modest economic growth implies that inflation should remain well-contained in a low interest rate environment.  The low interest rate environment is aimed at stimulating economic activity.  In addition, with the U.S. Federal Reserve on hold, the Bank of Canada must be sensitive to the fact that higher domestic interest rates would propel the Canadian dollar higher, dampening exports and economic growth.    
• Since the imbalance is concentrated in real estate, monetary policy would be a blunt tool to address the concern. Tighter regulations could target the risk more directly.  And, the impact on real estate markets is roughly equivalent to a 1% increase in interest rates.
• While the real estate market remained firm after the prior tightening of mortgage insurance rules, our assessment is that they did indeed slow personal debt growth.  Had the government not previously taken action, the ratio of personal debt-to-disposable income would be higher than 160%, the peak in the U.S. before their financial crisis.  Because the government did act, the ratio stands at 152% today.  The problem is that while debt growth did slow in response to the policy tightening, it continues to grow faster than income.  Given the pace of debt growth, further regulatory action was called for.  The effect is akin to gradually tapping on the brakes to temper borrowing and real estate markets.  This gradualist approach is sound given the risks involved. 
• It should be noted that the tightening of the mortgage insurance rules is coming amid stricter guidance from OSFI, the chartered bank regulator, which includes limiting Home Equity Lines of Credit (HELOCs) to a maximum loan-to-value of 65% and imposing more restrictive equity lending criteria.  Together, the new mortgage insurance rules and the more constrained supply of credit should go a long way in addressing the risks from personal debt and overvaluation in real estate. The actions support our long standing view that the current 10-15% overvaluation in Canadian real estate will be unwound over the next couple of years.  It also suggests that personal debt growth should slow to a low single digit pace over the coming year.

 

 

Craig Alexander, SVP and Chief Economist

416-982-8064

 

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