Friday, June 22, 2012

Mortgage changes concerns for borrowers

The Department of Finance has posted this Q A on its website.

Q. I already have an insured mortgage. How will these changes affect me?
A. Mortgage insurance is good for the life of the mortgage. Borrowers renewing their insured mortgages will not be affected by these changes. For example, if a borrower had a 30-year amortization and there are 27 years remaining on the mortgage, the mortgage can be renewed with a 27-year amortization, as long as no new funds are being added to the mortgage.

Q. What is required to qualify for an exception to the new parameters?
A. The new measures will apply as of July 9, 2012. Exceptions will be made to satisfy a binding purchase and sale, financing or refinancing agreement where a mortgage insurance application has been made before July 9, 2012. While the changes come into force on July 9, 2012, any mortgage insurance applications received after June 21, 2012 and before July 9, 2012 that do not conform to the measures announced today must be funded by December 31, 2012.

Q. Will a purchase and sale agreement dated prior to July 9, 2012 be considered binding if there are outstanding conditions that have not been fulfilled prior to July 9, 2012?
A. Yes, if the date on the purchase and sale agreement is earlier than July 9, 2012, and a mortgage insurance application has been made prior to that date, the new parameters will not apply, even if the conditions of the agreement have not been waived.

Q. Will the new refinancing rules allow a borrower with a mortgage above 80 per cent loan-to-value (LTV) to refinance by extending the amortization period?
A. No. Effective July 9, 2012, borrowers will not be permitted to refinance a mortgage above an 80 per cent LTV, unless the borrower has a binding refinance agreement dated prior to July 9, 2012, and a mortgage insurance agreement has been made prior to that date. 

Q. I have a written mortgage pre-approval from a lender, dated before July 9, 2012 with a 30-year amortization. Will I still be eligible for a 30-year amortization if I don’t sign an agreement of purchase and sale until July 9, 2012 or later?
A. No, a mortgage pre-approval without an agreement of purchase and sale is not sufficient to qualify for a 30-year amortization. You may have a 30-year amortization only if your agreement of purchase and sale is dated before July 9, 2012 and you have made a mortgage insurance application before July 9, 2012. You may wish to discuss with your lender to revise your mortgage pre-approval using the new parameters announced today.

Q. Will the new parameters apply to assignment (“switch” or transfer) of a previously insured loan from one approved lender to another?
A. No. As long as the loan amount and amortization period are not increased, the new parameters will not apply to a switch/transfer/assignment of the mortgage to a different lender.

Q. If I sell my current home and buy another, will the new parameters apply if I transfer the outstanding balance of my insured mortgage to the new home?
A. As long as the outstanding balance of the insured loan, the LTV ratio and the remainder of the amortization period are not increased, the new parameters will not apply when the mortgage insurance is transferred from one home to another.

Q. What if I need to increase the amount of my insured loan when I sell my current home and buy another?
A. In this situation, the new parameters will apply for any insured loan.

Q. If I bought a condo that is not expected to be built for another two years, will the new parameters apply?
A. If you bought a condo and have made a mortgage insurance application on or before June 21, then the new parameters would not apply. If you buy a condo and make a mortgage insurance application after June 21, the new parameters will apply if the mortgage loan is not funded by December 31, 2012.

Thursday, June 21, 2012

More changes to mortgage rules

 Guest Blog by Mark Kerzner, President of TMG The Mortgage Group Inc.

The current round of mortgage changes introduced by Minster of Finance Jim Flaherty today, June 21, 2012 took me by surprise.

First a brief recap of the changes:
  1. All changes are in respect to insured mortgage loans 
  2. Reduction in the maximum amortization from 30 years to 25 years
  3. Reduction in the maximum amount Canadians can borrow to refinance their current homes from 85% to 80% loan-to-value
  4. Mortgage customers are going to be qualified on maximum gross debt service ratios of 39% and total debt service ratios of 44%
  5.  Maximum property values to qualify for mortgage insurance must be less than $1 million.
  6.  These changes are going to come into effect on July 9th as opposed to previous announcements that any changes would come with 60 days notice
  7. These changes are in addition to the changes previously announced by OFSI about limiting the maximum loan-to-value on HELOCs to 65%
What are the implications of these changes?

According to published reports of leading economists these changes are going to help facilitate a "soft landing". Many are commenting that they are prudent given the continued run up of the debt-to-income ratios and extended period of ultra-low interest rates.

My concern is that these changes have targeted first time homebuyers to a much greater extent which could have a more significant impact on the housing market in Canada. I still believe our housing market, our financial system and our national economic health are all very strong but there are implications.

Moving amortizations from 30 years to 25 years is NOT the same as when they were reduced from 35 to 30 years. For example:

A $250,000 loan amount for 5 years with fixed interest rate of 3.29% the monthly P&I payments are as follows:

25 year amortization = $1,220.63
30 year amortization = $1,090.44 (The monthly cash flow difference between 25 and 30 years is $130.19)
35 year amortization = $999.86 (The monthly cash flow difference between 30 and 35 years is $90.58)

In this example the delta between the two is nearly 30% - a significant difference. In an economic report released this morning from CIBC it was estimated that "the direct impact of this move alone might cut the value of mortgage originations by close to 2%."

In January of this year, CIBC published a report showing that debt-to-income ratios were skewed towards habitual borrowers. It went on to say "A rising share of the highly indebted are over 45 years old, an age where accumulating net assets ahead of retirement should be paramount. Canadians nearing retirement, who should be in their prime savings years, are, instead, getting themselves deeper into debt." This is clearly not the same group most affected by today’s change in policy.

Reducing maximum amortizations by another 5% will make the cost of borrowing more expensive for mortgage consumers who are on the margins. For those who, in the past, used this opportunity in a prudent manner to consolidate higher interest credit then used the cash flow savings to more aggressively retire debt, those options have just been reduced.

For those borrowers who do need to refinance and who are now unable to will seek out more expensive private, unsecured lending products and credit cards to do so. When you consider such a high percentage of mortgage refinance dollars were spent on home improvement and consumer spending, I am concerned about the impact of this change on the economy as well.

Setting a $1 million mortgage insurance limit on property values is clearly going to target the larger urban areas such as Vancouver, Calgary and Toronto.

Why did these changes come into place?

Clearly the extended ultra-low interest rate environment we have been experiencing lately has spurred borrowing and had a positive impact on home prices across Canada. The Governor of the Bank of Canada, Mark Carney had been hinting at his desire in recent months to raise rates. This change gives Carney room to NOT raise interest rates. In fact, if the global economy does worsen, he may, in fact, have the ability to lower rates. A TD Economics report released today asserted that the tighter restrictions can target the risk more directly and have roughly the equivalent impact to a 1% increase in interest rates.

The global economy is still in bad shape.  While we have all been reading the headlines about Spain, Greece, the elections in France, etc., our world financial leaders must believe we are in for prolonged economic recession. As such, there is no time soon when interest rates are likely to rise. The Government decided to target the mortgage debt as a means to deal with the Bank of Canada's inability to raise interest rates.

I am disappointed, though. It was just two short months ago on April 10, 2012 that Flaherty was quoted as saying "I have no present plans to intervene in the housing market in Canada…there has been some moderation in the market of late. I would prefer the market itself to correct to the extent a correction is necessary."

 This reminds me when former US President George Bush said "Read my lips, no new taxes."

What do we do now?

I believe more strongly at this moment than ever, that Canadians should and MUST consult with a mortgage broker. After all, there is no channel more knowledgeable and informed than the broker channel in Canada. Secondly, changes are happening fast. There is no 60-day notice period. If you want to purchase or refinance, talk to your mortgage broker today.


Monday, June 18, 2012

Few changes to mortgage rules…so far

The anticipated mortgage rule changes haven’t materialized – yet. Maybe it was the strong messages from insiders in the mortgage industry that helped the Office of the Superintendant of Financial Institutions (OSFI) take a softer stand on new mortgage underwriting rules, a move that should lessen the fears of banks and mortgage brokers. 

The contentious issue around requalification for renewing has been shelved for the time being. Mortgage brokers had feared such a rule could cause some people to lose their homes. Banks tend to focus on a borrower’s payment history, as opposed to rechecking income levels or property values, when mortgages come up for renewal. Lenders were worried that renewals would be denied if either of those elements had deteriorated since the consumer took out their mortgage, said Jim Murphy, head of the Canada Association of Accredited Mortgage Professionals (CAAMP) in an article in the Globe and Mail.

Home equity lines of credit (HELOC) products have been capped to 65% LTV – not as bad as what was originally bandied about. The original proposal was that banks would have to amortize these lines of credit. Now, HELOCs can continue to revolve, as opposed to forcing consumers to pay them back within a shorter time frame.

Some industry watchers suggest that firmer rules are still coming. One in particular srrounds the use of automated appraisals. Banks often use automated appraisals rather than human appraisers because software is cheaper and can be turned around quickly. It looks as if OSFI will be watching this very closely and lenders are already upping their requests for on-site appraisals, which, some fear, may result in lower valuations.

Once again, we need to caution the government and OSFI to tread carefully with these changes. The changes are in part an effort to try to prevent another housing crisis like a subprime mortgage disaster. I think it’s time we put the “subprime” disaster and “bubble” fears to bed. While the new guidelines are intended to cool the country’s overheated housing market, the market has been correcting itself. It’s unfortunate that decisions are made on reports and data that are based on what has happened previously rather than on what is currently happening.

We have an economy that is already slowing down, despite low interest rates; household debt is becoming more manageable as consumers have made it a priority to pay off credit cards and loans; and consumers are becoming more financially aware. 

OSFI, the Bank of Canada and the government need to tread carefully. So far, Canada has managed to keep the economy strong and growing, despite the global crisis – let’s not stop that forward momentum.  OSFI will release its final guidelines with regard to mortgage lending, likely in July. We can only hope that the changes, if any, will keep the economy growing and not dampen it completely.