8 Jun

Genworth and Canada Guaranty do not tighten rules

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Posted by: Aneta Zimnicki

Further the to CMHC announcement last week about insured mortgage criteria, Genworth confirms that it has no plans to change its underwriting policy related to debt service ratio limits, minimum credit score and down payment requirements.

Shortly thereafter, Canada Guaranty also confirms that no changes to underwriting policy are contemplated as a result of recent industry announcements.

“Canada Guaranty utilizes a dynamic underwriting process where our underwriting policies are consistently updated to reflect evolving economic environments and emerging mortgage default patterns. This philosophy has resulted in the lowest loss ratio in the industry. Recent insurer announcements relating to down payment and minimum credit score represent a very small component of Canada Guaranty’s business, and we will continue to be prudent in these areas. Given implementation of the qualifying stress test and historic default patterns, Canada Guaranty does not anticipate borrower debt service ratios at time of origination to be a significant predictor of mortgage defaults.”

The competition is on. Let’s see if this translates to benefits to the consumer.

5 Jun

CMHC tightens lending criteria

General

Posted by: Aneta Zimnicki

Boom. CMHC makes more announcements.  Here are the technical details, followed by what this all means and my commentary, how this may affect the market.

Effective July 1, CMHC insured mortgages:

  • The maximum gross debt service (GDS) ratio drops from 39 to 35
  • The maximum total debt service (TDS) ratio drops from 44 to 42
  • The minimum credit score rises from 600 to 680 for at least one borrower
  • Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes

Additional clarification:

  • Essentially affects owner occupied purchases, less than 20% down payment
  • The debt ratios translate to purchase power decrease by up to 11%
  • Non-traditional sources of down payment included unsecured personal loans or unsecured lines of credit. Still ok is savings, the sale of a property, or a non-repayable financial gift from a relative
  • Official reason: “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

My commentary:

  • July 1 deadline will create temporary frenzy with buyers.
  • This change grossly affects first time home buyers. 61% of these buyers buy with less than 20% down, which means they have to go through mortgage insurance.
  • Inevitably, this will shut out some buyers completely out of home ownership.
  • This means more renters.  There is already a rental housing shortage.  Rents will not become more affordable as a result, contrary to the ‘affordable housing’ government mandate. Additionally the government has not made it any easier for landlords and rental property financing, aggravating the situation. Minimal incentive to add to rental housing stock.
  • There may be more competition for lower priced homes outside of higher priced cities, to match with the new debt ratios.
  • Last month CMHC floated the idea of minimum 10% down payment.  Today’s announcement is another way to slice the same cake.
  • It’s like increasing the current stress test rate by about 1.3%.
  • The other two private insurers, Genworth and Canada Guaranty are not directly affected. Early indications seem to suggest they will not follow, but this still is being evaluated, no additional information at this time. Perhaps there will be some healthy market competition.
  • Is the ‘non-traditional source of down payment’ a reasonable concern? Based on a Feb 2020 survey, only 2% of down payments for CMHC insured borrowers with loan-to-values above 90% were from ‘non-traditional sources’.
  • CMHC standing firm on their controversial estimate last month of 12 month house price decrease of 9 to 18%….It’s like they want this to happen based on their policies, and make right with this statistic.

For real estate investors, another game changer:

CMHC suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing. “Consultations have begun on the repositioning of our multi-unit mortgage insurance products.”  So, not much more details given at this time, as you can see, but major game changer.

3 Jun

CMHC being controversial

General

Posted by: Aneta Zimnicki

Recently CMHC (Canada Mortgage and Housing Corporation) dropped a few bombshells during a parliamentary speech  The headlines implied: ‘Minimum down payment of 10%’, ‘18% drop in housing prices’, ‘One-fifth of mortgages to be in arrears’. Let’s peel this onion of misleading headlines.

Firstly, remember that CMHC is a government entity and one of its goals is to minimize risk and exposure to tax payers. So in that context, it has to make prudent decisions. In my personal opinion, even if policies are not implemented, ‘talking the market down’ can have a similar effect. However, I do not agree how this recent information was presented, it was very poorly communicated, grossly misunderstood and lacked industry consultation. It causes unnecessary loss in consumer confidence.

They provided rationale behind a possible 10% down payment as the new minimum, including how ‘minimum down payment mortgages’ are more likely to default. Note, this is just a proposal, we don’t know if and when this would be implemented. Of course, one of the major concerns is the new blow to first time home buyers, who now may never get their foot in the door. Purchases over $500K already have a (sliding scale) 10% down payment requirement, so the biggest change would be to the ‘more affordable’ housing price range.

The 18% drop in housing prices is a sound bite. The 18% is actually the higher end of the 9% to 18% range they provided in their estimated average national housing price drop in the coming 12 months. But there is no such thing as a national housing market. It is very much location specific. So implementing broad brush policies based on those statistics is not effective. Some regions have seen significant increase in prices over the last year or so, so even this possible drastic drop would put them where they were a year or so ago, hardly what you would call ‘the bottom dropping out’. Indeed, some regions, particularly where job loss is high, will see some higher declines, and perhaps this is where a scalpel needs to be applied to the policies to reduce the risk. We don’t have a crystal ball, but at the moment, the industry consensus is that the CHMC prediction is over-estimated.

Interestingly, the government was so overly confident about house values, that they rolled out the First Time Home Buyers Incentive ‘shared equity mortgage’ just last year to help entry level buyers. Understandably, COVID-19 could not be predicted, but the span of the government’s confidence in the housing market from then and now is broad and the message causes confusion.

Lastly, the math lesson. What the written announcement said: ‘We estimate that 12 per cent of mortgage holders have elected to defer payments so far, and that figure could reach nearly 20 per cent by September.’ What the people heard ‘20% arrears = foreclosure city, 1 in 5!!!’ CMHC had to later clarify via twitter: “12% of mortgages are in deferral; that could be 20% by Sept. Deferred mortgages are not in arrears since they are deferred with lender…That 20% is *at risk* of being in arrears 90 days after a required payment is missed.”

Further to that, the latest statistics on mortgage arrears (Jan 2020) is 0.24% of all mortgages are in actual arrears 90+ days. Historically, Canada has not gone over 0.5% delinquency rate, even during the last financial crisis. Even when you chart the closely correlated unemployment rate with mortgage arrears, the projection is still hovering under 1%. (Source: Canada Banker’s Association).

Additional confirmation of this is the Bank of Canada currently expects the arrears rate to peak at 0.80% by the third quarter of 2021.

When you see headlines like ‘mortgage deliquencies expected to rise 200%’ (as in the recently published Transunion report), remember the math: 200% increase on 0.24% is 0.72%. Remarkable how low that is.

I am not saying we have a rosy financial picture right this moment, but this context certainly put things in better perspective.

It will not surprise me if CMHC continues to evaluate their underwriting policies (translation: tighter rules). They continue to hint at being able to ‘cover losses’ if there are claims. Another very fresh bombshell is their recent announcement about multi-unit commercial property refinancing. There is minimal guidance provided on this one so far, allow some more time for details. In general, the idea is they do not want to have equity take outs that are not re-invested back into housing.

There are two other private mortgage insurers in the marketplace. Whether they implement or mirror any changes CMHC does is unknown at this time. But perhaps there will be some healthy competition. We will have to wait and see.

3 Jun

Bank of Canada maintains the rate steady

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Posted by: Aneta Zimnicki

Bank of Canada maintains the rate steady. This means your variable rate mortgage remains unchanged.  Admits that the outlook remains ‘heavily clouded’, however, states that the current programs are improving market function.

‘Impact of the COVID-19 pandemic on the global economy appears to have peaked, although uncertainty about how the recovery will unfold remains high.

The Bank’s programs to improve market function are having their intended effect.

The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway.’

Next scheduled announcement is July 15.

Interestingly, today Tiff Macklem, has been appointed the new Bank of Canada governor, taking over Stephen Poloz who has been in that position for 7 years. The captain has changed, will there be any change to the ship’s course?

22 May

Benchmark qualifying rate drop

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Posted by: Aneta Zimnicki

Not extraordinary, but good news nonetheless.  Since the last newsletter, the qualifying benchmark rate has dropped to 4.94%, down from 5.19% before COVID-19.  This means you can qualify for slightly higher mortgage, or for some folks, it actually means graduating from a B lender to an A lender.  If this trajectory continues, we should see further drops.  However, in my opinion, the government will not allow the buffer between contract and qualifying rate to erode too far, they always play the cautious game.

15 Apr

Bank of Canada holds rate steady – Puts economy on life support

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Posted by: Aneta Zimnicki

Bank of Canada had their scheduled meeting today, and decided to hold the rate steady. It stated it considers its current rate the ‘effective lower bound’. Also announced new measures to provide additional support.

“The Bank’s Governing Council stands ready to adjust the scale or duration of its programs if necessary. All the Bank’s actions are aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.”

Your variable rate mortgage remains unchanged, but should be benefiting from the previous several drops already done via the unscheduled emergency meetings.

Next scheduled announcement is June 3.

 

Here are insights from Dominion Lending Centres Chief Economist Dr. Sherry Cooper. My summary below. Dr. Cooper ends on the note that she feels Canada may fare better than other countries.

>The Bank of Canada, along with all other central banks, have taken measures to support the functioning of core financial markets and provide liquidity to financial institutions.

>It did not cut this policy rate again today, as promised, believing that negative interest rates are not the appropriate policy response.

>The Bank will support all Canadian financial markets, with the exception of the stock market.

>This is exactly what the central bank needs to do to instill confidence that Canadian financial markets will remain viable. These measures are a warranted offset to panic selling. Too many investors are prone to panic in times like these, which has a snowball effect that must be avoided. As long as people are confident that the Bank of Canada is a backstop, panic can be mitigated. The Bank of Canada deserves high marks for responding effectively to this crisis and remaining on guard. Governor Poloz and the Governing Council saw it early for what it is, a Black Swan of enormous proportions.

>As a result, Canada will not only weather the pandemic storm better than many other countries, but we will come out of this economic and financial tsunami in better condition.

Full article at this link 

 

 

30 Mar

So Why Are Mortgage Rates For New Loans Rising?

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Posted by: Aneta Zimnicki

So Why Are Mortgage Rates For New Loans Rising? From Dominion Lending Centres Chief Economist, Dr. Sherry Cooper, see link below to full article

My Summary:

The banks have reduced prime rates by 1.5%, but have hiked mortgage rates for new fixed- and variable-rate loans. These are extraordinary times.

The good news is that people or businesses with floating-rate loans are benefitting from the 1.5% rate drop.

The Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.

Covid-19 has markedly reduced earnings of banks and dramatically increased their risk. Their stock prices have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. The gap between these two yields is a reflection of the investor perception of the risk confronting Canadian banks.

The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline.  Lenders have also been swamped by thousands of applications to defer mortgage payments. The cost of funds has risen sharply.

Hence, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans.  Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.

Financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.

These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed (US) and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning.

We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.

https://dominionlending.ca/news/why-are-mortgage-rates-rising/

27 Mar

Bank of Canada Moves to Restore “Financial Market Functionality”

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Posted by: Aneta Zimnicki

Great economic insight on today’s Bank of Canada rate drop from Dominion Lending Centers Chief Economic, Dr. Sherry Cooper.

My summary:

Strains in the commercial paper and government securities markets triggered today’s action to engage in quantitative easing.

These large-scale purchases will create the liquidity in the financial system. Risk has risen, which creates the need for more significant cash injections.

The oil price cut alone would have been sufficient reason for the Bank of Canada to lower interest rates.

At this point, the Bank is not contemplating negative interest rates. Monetary policy has little further room to maneuver, given interest rates are already very low. With businesses closed, lower interest rates do not encourage consumers to go out and spend money.

Large-scale debt purchases by the Bank will continue for an extended period to provide liquidity. They want the economy to have an excellent foundation for growth when the economy resumes its normal functioning.

The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity. The banks are well-capitalized and robust.

See Dr. Cooper entire article https://dominionlending.ca/news/bank-of-canada-cuts-rates-50-bps-to-0-25/

27 Mar

Mortgage deferrals and other financial relief you may not be aware of

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Posted by: Aneta Zimnicki

Mortgage deferrals are on the table.  But don’t assume guaranteed automatic approval.  Details depend on lender. See DLC COVID-19 page  https://dominionlending.ca/covid-19/ for contact info.  Have patience, lender phone lines are jammed.  Some lenders offering email request forms to streamline. Some lenders loosening up requests to extend to deferral on rental property as well. For the most part, some explanation of your income and financial hardship is needed. 

As you can expect,  a deferral is not consequence free, it will cost you interest, and also stick you with possible higher future payments, but it does offer immediate relief.  Renters should understand this is not a free pass to skip on rents, much hot debate in this arena.  Also, it is noted within the industry, that if you truly don’t need deferral, consider not filing this request, it will help keep our financial systems more stable and leave room for folks who truly need help with the deferrals.

Get everything in writing when you request your mortgage deferral.  Get the customer service rep confirmation number. It is promised that this should not affect your credit, however, mistakes can happen.  A mortgage missed payment is a very serious mark on your credit. Prepare yourself upfront by setting up credit monitoring at Equifax (the most popular report with lenders) https://www.consumer.equifax.ca/canada/home/en_ca_e/?efx_ref=null and at Transunion https://www.transunion.ca/.  The ongoing monitoring service is not free, but is critical if issues arise.  There is a free option by snail mail (does not include your score), available to you once per year.  Note that there is a lag in reporting, so it may take a month or so before credit is reported to the credit reporting agency.

At the time of this writing, looks like Equifax is stepping up and offering their one time report, with score included (usually about $25), for free.   https://www.consumer.equifax.ca/personal/products/credit-report/  Transunion has a free once per month disclosure report (will not include score). Make sure you don’t navigate out of the webpage once they display report…you will burn your monthly freebie (their interface is tricky and annoying) https://ocs.transunion.ca/ocs/home.html?lang=en

There are other ‘free credit reporting’ services out there, I cannot confidently comment on their validity or comprehensiveness.  Mortgage lenders use direct Equifax and Transunion, and the algorithms for the scoring is specific to that purpose.  You may see a different score on the consumer end, albeit it should give generally a good idea.  Lenders do use score as a guideline, but they look at each trade line item as well, that is why opening a full report and checking for mortgage delinquency items is important.

Some mortgage payments include property tax.  Make sure a missed payment or deferral in one doesn’t trigger non-payment in the other, especially the mortgage! I have seen some mistakes before on client files, triggering mortgage non-payment reporting.  I always recommend keeping mortgage and property tax payments separate for several reasons, despite the inconvenience to some borrowers.

Consider using your existing secured line of credit in combination, or in lieu of, mortgage deferral.  It may be a cheaper interest option.  As a proactive measure, consider getting secured lines of credit.  Or explore a refinance. Contact me to explore the options.

Take advantage of the various other deferral programs.  Many cities offering property tax deferral, utility deferral.  There may be some condo fee deferrals as well.

There may be some relief with your credit cards and unsecured loans, try contacting them to see if they can help.  I wouldn’t be surprised if there is some government announcement about help on this matter in the future .

27 Mar

Bank of Canada lowers overnight rate by 0.5% again

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Posted by: Aneta Zimnicki

Bank of Canada lowers overnight rate by 0.5% again.   This totals 1.5% drop in the last several weeks.  Most lenders are matching this latest drop, prime rate for the most part is now 2.45% (updated).  Your variable rate mortgage and secured lines of credit  will benefit.  Exact word from BoC:

“The intent of our decision today is two-fold: to immediately support the financial system so it keeps on providing credit, and, over the longer term, to lay the foundation for the economy’s return to normalcy.”

Next scheduled meeting is Apr 15.