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.

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