Monday, February 06, 2012

Why Canada isn’t a NINJA?

Guest Blog by Dan Pultr, Director Sales, B.C.

Once again, the headlines in the past few weeks have been focused on the mortgage market. The most recent are about the sub-prime market and programs for the self-employed, which some are seeing as the no income, no job, no assets (NINJA) scenario as described in the United States.

Here are just a few examples: Looser lending standards by Canadian banks raise concern;
Increasingly liberal’ mortgage standards worry regulator; and  Flaherty concerned by mortgage lending

We have heard for weeks that the Big 6 banks have been talking about reducing amortizations on mortgages to combat some of these market concerns.  Then, on January 31, one mortgage lender made a somewhat surprising announcement that they would be eliminate all “stated income” programs.  This unprecedented change came just days after a news release from the Office of the Superintendent of Financial Institutions (OFSI) noted that Canadian lenders had loosened their qualifications standards. There was a concern that these lending practices were mimicking the U.S. subprime market.

Let’s consider this comparison.  The sub-prime meltdown in the U.S. was not caused by one factor alone, but rather a combination of them:
1.      Loans were given to individuals with no income, no job and no assets (aka NINJA)
2.      Loans were approved at over 100% loan to value, thus eliminating any equity.
3.      Teaser rates were the craze. Home buyers qualified on low rates and payments reflected that. However, when interest rates were adjusted to a higher rate, payment became unaffordable.

This lethal combination was made worse by the fact that 50% of mortgage loans were these sub-prime loans. The recent Canadian headlines are suggesting that this is now happening in Canada.

Business for Self Programs

Business for Self income means individuals, usually the self-employed can state their income to qualify for their mortgage with certain caveats. The reason for this practice is because the tax returns of the self-employed do not always accurately reflect their total income since they are able to write off a number of items to reduce their taxable income.

However, there are also protections in place to make sure that in the event of rising interest rates, mortgage payments are still affordable.

1.      Self-employed, stated income programs require at least 10%, and sometimes higher, down payments from own sources, no gifted down payments are allowed.
2.      High-ratio variable rate mortgages, which is a mortgage with less than 20% down, requires borrowers to qualify at a benchmark rate, which is currently 5.29%, almost 2.5% higher than the lowest variable rate today.
3.      Mortgage insurers use a reasonability test when judging stated income, meaning that the line of work, the amount of assets, credit and business statements, are reasonable for that industry.
4.      If income and net worth are not a consideration, then an individual must have either 35% in equity or from their own resources.

Since the OFSI has suggested that lenders have loosened up there rules, we are now seeing the beginning of the end for these stated income programs, which is unfortunate. Stated income is an important part of a healthy mortgage market, and elimination of this product could dampen the housing market.

Self-employed individuals account for 15.6% of the Canadian workforce and 10.6 million people work for privately owned enterprises in Canada, with 48% of them working for a small business. Penalizing entrepreneurs for creating businesses and employment is not beneficial to the health of our mortgage market, or to our economy.

1 comment:

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