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.

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.