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.

Where’s the tipping point?

Guest Blog by Mark Kerzner, President, TMG The Mortgage Group
 

We have a new development in the mortgage industry. We have The Office of Financial Institutions (OFSI) looking at exerting their newly-given influence on the mortgage guidelines in Canada.  The fact that OFSI has been granted additional responsibilities that include oversight of key lending guidelines -- vis-a-vis what CMHC will insure and therefore what the banks will lend on -- seems to simply be a catalyst to accelerate additional guideline policy changes. Make no mistake about it; these were discussed long before OFSI came onto the scene.

The Government made a number of credit changes following the Global Economic Crisis to instill more responsible lending practices and reduce the risk of a similar housing meltdown that was experienced in other countries, including the US. In retrospect, those changes -- reducing maximum amortizations, increasing down payment requirements on rentals, reducing the amount you could refinance, etc., were prudent. After all, house prices continued to appreciate, real estate activity remained strong and arrears levels remained muted.

And even more recently (since January 2012) we have seen the banks further tighten their own lending guidelines in the absence of formal required changes as set out by the Minister of Finance. An example would be the additional tightening of the Business-for-Self and Equity programs.

The Canadian economic recession was relatively short lived following the global economic meltdown. In fact, Canada was the first significant country to increase its overnight rate in June 2010. The Bank of Canada continued to increase it three more times in the summer of 2010 to 1%. So, given we have already survived the various credit and qualification changes and our market has remained strong, why am I concerned at the prospect of further tightening?

For me, it starts with this question: Where is the tipping point? What change will cause our market to slow down, which is the obvious goal, and what change could cause our market to head into a tail-spin? Or will the market remain the same whether changes are made or not? I don't have the answer for this but the last time I felt this way I was playing PLINKO with my kids not knowing which straw would cause the remaining balls to fall.

My sense is that if there are additional changes focussed on ensuring affordability and suitability -- that would make sense. Those are responsible changes. However, if as an industry, we have to re-evaluate how a renewing customer who has a perfect repayment history has to requalify for a mortgage - that is worrisome. That is the type of change that, in its worst case scenario, could force an increase of supply of homes in the market from people forced to sell because they can no longer qualify BUT who had no intention of defaulting on their mortgages.

Changes focussed on refinances and renewals may impact those with a proven ability to make their payments.  It is not impacting potential supply (ie. new construction) but existing supply.  On top of that, a large percentage of additional funds taken out in refinances are used in home improvements, which increases the value of the property, and for consumer spending. A slowdown of either of these two components could prove problematic. And let us not forget that guidelines now require a minimum of 15% equity for a refinance – up from 5% just a few short years ago.

I understand why a slowdown is desirable. I have heard some experts say, "If there isn't a slowdown it makes a crash more likely.”  I get that, and I support that position. I just want to ensure that a manufactured slowdown targets habitual borrowers and not the demonstrated responsible ones.
 
There are more guideline changes and restrictions coming. The Bank of Canada, the Minister of Finance and many regulators would like to see the Canadian housing market cool off. However, changes must be stress tested against the worst case scenario, which would be triggering a market collapse.

What we know about you – mortgage consumers

The 2012 Mortgage Consumer Survey prepared by Canada Mortgage and Housing Corporation (CMHC) tells those in the mortgage industry a lot about you, the consumer – your buying habits, where you go to look for information, the kind of information you look for, etc.

The online survey was completed over February and March of 2012 by more than 3500 mortgage consumers who had completed a mortgage transaction in the previous 12 months. Here are few highlights of that survey:

Online Activity 

•  When researching mortgage information, 71% of consumers went online; this is up from 65% in 2011.
• Facebook was the most popular social media network used to gather information, especially among first time home buyers.
• The two most actively searched items were interest rates at 86% and mortgage options at 73%.
• And not surprisingly, 38% of 18 to 24-year-olds used mobile mortgage apps.

Using Professionals

•  Consumers are turning more to mortgage professionals to help them with their mortgage decisions.
• Consumers are asking a lot more questions about mortgages – 71% asked about differences between mortgage products; 67% wanted information about mortgage loan insurance; and 67% asked about penalty clauses.
• Consumers like referrals and most referrals come from a family member or a financial planner.

The Mortgage Process

• Before making a decision about a mortgage, consumers spend about five weeks doing research; first time home buyers spend  about eight weeks.
• Consumers are now more prepared when meeting with their mortgage professional and come armed with a list of questions and the necessary documentation.
• Eighty per cent of consumers felt confident they made the best decision with their mortgage product.

Mortgage Free

• Thirty-one per cent of mortgage holders made lump-sum payments or increased their regular payments to pay off their mortgage sooner.
• Nearly half of all buyers set their monthly payment higher than the minimum to pay off their mortgage sooner.

The survey findings are positive indicators that consumers are increasing their knowledge about financial matters. Four in ten home buyers went online and did a financial self-assessment. And a whopping 80% felt they had a good understanding about how much they could afford and what options were available to them.

Consumers who educate themselves about the financial options available will learn how to make consistent, informed financial decisions and that will help them to achieve their goals. This survey shows that Canadian consumers are on the right track.

The survey also makes clear that mortgage professionals are in a unique position to help educate consumers about their mortgage options and ways to pay off that mortgage sooner. 

Where can the economy go to grow?

Two recent reports from Stats Can offer good news for the economy. In April, 58,200 more people found full-time work -- this is the second month in a row there has been an increase in jobs.

Further, the pace of household debt has slowed to levels seen prior to 2002. Delinquencies are down on lines of credit; there is healthy demand for auto loans and outstanding mortgage loans are below the rate of growth seen in the past two years.

What we have right now is a stabilizing economy. We also have an economy getting ready to grow.  And with that, there are new questions surrounding when and if the Bank of Canada (BOC) will raise interest rates this year and even questions about where will growth come from and how will we grow.

The slower pace in consumer credit markets, the federal government warnings of mounting debt loads and recent changes to mortgage rules have kept home prices in check.

Increasing construction starts are also a sign that the housing industry foresees good days ahead. And low interest rates are keeping buyers buying.

The challenge for the government and the BOC is how to keep the economy growing healthier and stronger in a world where global economies are weak. The US economy sputters along not knowing where to go, or if it should go at all. European countries can’t seem to reach financial consensus and emerging market economies like China have turned out to be weaker than expected.  No country is an island and Canada must be realistic about its current growth potential. We are in an enviable position but we have to wait for everyone else to catch up.

Should the BOC raise its overnight rate? In a recent CIBC report, economist Avery Shenfield wrote, “It’s not about whether Carney will look at June, July or September to strike, but whether the economic news this year will be sufficiently buoyant to raise rates at all.”

A rate hike at this time will directly impact consumers and may slow consumer credit markets even more, which would adversely affect our manufacturing sector and retail sales. With our largest trading partner not planning any rate hikes until 2014, it might be prudent for Canada to wait it out.

Rate hike or not?

There are, once again, conflicting headlines with regard to the economy and the future of interest rates. On the one hand Canada’s recovery is picking up faster than expected,  which had the Bank of Canada’s (BOC) Mark Carney hinting at the eventual increase of interest rates – perhaps sooner than later. Both the central bank and the International Monetary Fund lifted their Canadian forecasts for the year, suggesting a slightly better global scenario is benefiting our labour market and boosting business confidence.

On Tuesday, April 17, Carney left his key rate untouched for a 13th consecutive decision – the 1 per cent overnight rate has been holding steady since September 2010. The balancing act for Carney is to ensure inflation stays under control as the economy strengthens, but without dampening consumer spending and/or curtailing business investment that will be crucial to the country’s growth over the next couple of years.

The BOC clearly laid out its case for raising rates. The bank boosted its 2012 growth forecast for Canada to 2.4%, from 2 % in January. While it cut its 2013 forecast to 2.4 per cent from 2.8 per cent, policy makers said the economy will be back at full tilt in the first half of 2013, instead of in the third quarter of that year.

Then a few days ago, Statistics Canada reported the inflation rate had dipped to 1.9% in March -- the first time since September 2010 that the rate has fallen below the Bank of Canada’s target of 2%.  So now what?

Over the past couple of years the mortgage industry has repeatedly warned Canadians to be careful with their finances because interest rates are bound to rise eventually. Yet the variable rate was deeply discounted until a few months ago and fixed rates have fallen to historic lows. And now, with Carney hinting that rates will rise, the mortgage industry is once again preparing clients.

When we take a look at the bigger picture there are some influences that suggest rates may not increase until much later than the summer of 2012 or Carney may even wait until 2013.

First of all, the U.S. Federal Reserve Board said it will stick with its near-zero rate until 2014, putting pressure on Canada to keep its prime rate as is. The rebound in the United States, Canada’s chief export market, seems to be coming in short bursts – forward momentum, then a retreat – suggesting that the U.S economy is still vulnerable and unsteady. Considering this is an election year, it’s likely to stay that way until the election is over. 

Secondly, the euro crisis, until a few days ago, was no longer considered an urgent threat, and then came the collapse of the Dutch government and once again Europe is in deep. 

Thirdly, at the mere hint of an interest rate hike, the loonie shot up more than a full cent against the U.S. dollar, which does not bode well for many of our business sectors.

Last week Carney did say the “timing and degree” of interest rate moves would depend on developments in the coming weeks. Those developments are already here. And while he has hinted at a summer hike, well, without a crystal ball, it’s still too early to call. Last July, Carney sent a strong signal that higher rates were coming, only to reverse that stance in September.  Avery Shenfeld, chief economist at CIBC World Markets said recently, “It won’t take much of a disappointment in growth for the Bank to further delay this next round of rate hikes.”

TD Economics believes that the BOC cannot raise interest rates by more than one percentage point while the Federal Reserve is on hold. Doing so would result in a dramatic rise in the loonie and could weaken the economy.

One thing we can be sure of is that when the hikes do come, they will be gradual.

The home financing experience

Guest Blog by Mark Kerzner, President TMG The Mortgage Group

Fifteen years ago my wife and I bought our first home. This anniversary brings to mind two somewhat related thoughts.

First, the home buying experience itself. I am not talking about the stress of looking, prioritizing must-haves, or going from open house to open house. I am referring to the specific night when we negotiated the deal.

On that night we were sitting outside in our car -- it was cool and foggy -- while our agent went in and out of the house to deal directly with the listing agents and vendors. The entire transaction took about three hours to complete. We really had no idea what conversations were taking place on the inside and we weren’t a party to it. We were relegated to the tight and uncomfortable confines of our car mulling over all of our own what-if scenarios. At the end of the day a deal was struck and we purchased our first home.

We found the whole process completely devoid of all interaction. You would think if you were making a $300,000+ purchase you would feel good about it, or at least a bit valued. Imagine going into Cartier and being told to wait in the closet while your representative negotiates for your watch from the jeweler? Or imagine buying a Ferrari and not being allowed to test drive it first? Your house is the biggest purchase you will likely ever make yet the buying process can be extremely impersonal to the extreme.

Then it came time to arrange the mortgage. Our banking relationship was with a large national trust company so, of course, we went into the branch to arrange for our financing. I believed I really did my homework before I went in and was seeking 100 basis points (bps) below their posted rate on a 5-year fixed rate mortgage.  I wasn’t going to settle for less. I had no idea what the average spreads or profits were on the bank's mortgages, I just knew I wanted a discount of 100 bps.

The generalist we spoke with said she was authorized to discount only 50 bps despite the fact that all our banking products were with that institution. To go beyond that level she would have to speak with the branch manager.  This reminded me of a car buying tactic dealerships use to take advantage of unsuspecting buyers. It was also when I decided on a new personal philosophy that I will deal only with those who have the authority to deal with me directly.

Today mortgage clients have tons of information at their fingertips -- perhaps too much. Social media combined with the Internet and transparency of information is helping the consumer become much more informed than ever before.

When I arranged my first mortgage, I would never had thought about what China’s GDP, the Euro Crisis, Canadian monetary policy, covered bonds, CMHC debt ceilings, etc., would have to do with me getting a mortgage.  I didn’t understand “spreads”, discounting or cash backs. I don’t even know if the 100 bps was a good deal, but I got it in the end.

All this information is likely to confuse a great many people. It is also possible that information conveyed inaccurately by uneducated people may sway some into products they shouldn’t be in. For example, interest only HELOCs for first time homebuyers arranging financing may not be the best fit athough it may represent the best cash-flow option.

I believe the banks, their branch networks and sales forces have taken a page from the mortgage broker model. I believe it was the broker channel that first started to really educate the consumer – offering transparent pricing and expert advice.  The banks have copied the brokers.

Copying is the highest form of flattery. I think with all the information at our collective fingertips it is vital to continue to seek out the advice of a mortgage professional – a broker. In their role as an expert, combined with their unique ability to offer choice they are best position to help you, the end consumer, navigate through these very murky waters.

There are still good mortgage products available

It’s been a year since the Government of Canada last implemented changes to the mortgage rules. Since March of 2011, when the rules went into effect, there has been a slow down in the refinance market, yet home sales have not been seriously affected.  Then the government warned Canadians about increasing debt loads and there were worries around specific mortgage products and loose qualifying criteria for self-employed individuals and for new immigrants. Many lenders pulled their Stated Income programs for these groups. With the bond market reacting to the economic crisis in Europe and the U.S. slowdown, the fixed rate dropped to record lows and lenders started to eliminate discounts on their variable rates.

House prices have stabilized; the economy is showing modest growth and the Bank of Canada may start increasing its prime lending rate at the end of 2012. While some of the changes have impacted the market, there are still a number of mortgage products available. Let’s take a look at what’s gone and what’s left.
Here’s a recap of the changes:

•  The maximum amortization period for mortgages was reduced to 30 years from 35 years for insured mortgages with loan-to-value ratios of more than 80 per cent. This made it more difficult for some first time home buyers to qualify for a mortgage but also reduces the total lifetime interest payments families make on their mortgages.

• The maximum amount home owners can borrow to refinance their mortgages went from 90% to 85% of the value of their homes. Refinancing was a tool used by many homeowners to consolidate their high interest debts.

•  Government insurance backings on lines of credit secured by homes were withdrawn.

•  The Canadian Housing and Mortgage Authority’s (CMHC) funding cap has almost been reached. CMHC is the provider of government-backed mortgage loan insurance. Because the government will not increase that cap, CMHC will no longer bulk insure mortgages for lenders. The result is that CMHC will curtail its activity, which might make it more challenging to get approved for a high-ratio loan.

So what is left? Lots!

•  A few lenders still offer 35 year amortizations.

•  Lenders still offer Purchase Plus products for renovations, on both new purchases and on refinances.

•  Cash Back products are still available that help buyers with down payments and closing costs.

•  First time home buyers can still qualify for a mortgage if they borrow the down payment.

•  Stated income products are still available for the self-employed through a few lenders

•  Lines of credit are still available but are not insured.

•  A few lenders are starting to discount their variable rates.

Everyone has a unique situation. To find a product that works for you, talk to a mortgage professional.