Tag Archive for: CMHC

Rules, Rules, Rules

Here is the information regarding the new mortgage rules that will come into effect on April 19th of this year. The changes are not as bad as some were predicting. This is the summary, and the text is below.
Starting April 19th
1. Borrowers need to qualify using the 5 year fixed rate
2. Refinances maxed out at 90% LTV
3. 20% downpayment for mortgages tied to non-owner occupied properties bought for speculation.
Canada will bring in new mortgage rules to cool the country’s red-hot housing sector, but does not think the market has entered into bubble territory, Finance Minister Jim Flaherty said on Tuesday.Concerned that new homebuyers may overextend themselves, the government said it is implementing three changes to mortgage rules that will help prevent the problems seen in other countries that helped trigger the global financial crisis.

“Today’s measures are part of a larger picture. We will continue to closely monitor developments in the housing sector in Canada,” said Flaherty at a news conference in Ottawa.

“There is no compelling evidence of a housing bubble, but we’re taking proactive, prudent, measured and cautious steps today to help prevent a housing bubble.”

Changes to Canada’s mortgage insurance guarantee framework that come into effect on April 19 include the requirement that borrowers will need to qualify for a five-year fixed-rate mortgage even if they go with a lower variable rate.

The government will also lower maximum amounts that can be withdrawn when borrowers refinancing mortgages. And it will require a minimum downpayment of 20 percent for insured mortgages tied to non-owner occupied properties bought for speculation.

Flaherty described the housing market as “healthy and stable” and said that the government’s early action can help prevent negative trends from happening.

The government has been concerned that some borrowers who are taking out variable-rate mortgages will struggle with their monthly payments when interest rates rise.

Bank of Montreal, while noting it did not believe the country faced a housing bubble, said it supported the government’s actions.

Feel free to contact me if you have any questions, and I look forward to hearing from you.
Cheers,

Pat

p.s- You can find me on Twitter,Linkedin, Facebookand friendfeed.

Setting the record straight!

This post is in response to an article in the business section of today’s Chronicle Herald newspaper. While I admire and respect the broker quoted in the story, I believe that some of the message can easily be taken out of context and I just want to set the record straight. 

I have been a mortgage broker for just over 6 years now. During this time a lot has happened and a lot has changed in the Canadian mortgage market. Canada started off with only one true sub prime mortgage lender, several had entered the market and now we are back to only one again. With the advent of rampant sub prime lending here in Canada; we were introduced to 100% financing, stated income products, interest only mortgages and products for clients with less than perfect credit. While 95% of Canadian mortgage holders are unaffected, the 5% who have a mortgage from a sub prime lender should have a game plan (to prepare them) for renewal time. 

The main reason that I place clients with sub prime or alternative lenders is to get them financing until such a time that they could qualify for a main stream insured lender. I look at the sub prime lender as a bridge lender, who will give the clients time to improve their credit and or pay off debt before qualifying for better rates and terms. It would be a disservice if I expected any client to renew their mortgage with their sub prime lender. 

Would I tell all my clients who hold mortgages with sub prime lenders to sell their properties? No I would not. We would have to look at the reasons why they are with these lenders, how much time before renewal and help them develop the proper exit strategy. I do plenty of private loans and this is not any different. Just as with any private loan, you should also know your exit strategy. 

If you are someone who has a mortgage with a sub prime lender (such as Xceed, and others), don’t panic! There are still things that can be done prior to your renewal time. Please call my office so we can look at your options. 

Cheers,

Pat

 

p.s- You can find me on Twitter,Linkedin, Facebookand friendfeed.
Stumble it!

A zero-down mortgage by any other name?

LORI MCLEOD

Globe and Mail Update

July 31, 2008 at 7:49 AM EDT

As the financial industry sits down with Ottawa this week to assess tighter mortgage rules, another lending product could find its way into the spotlight – cash-back mortgages.

Keen to avoid a U.S.-style housing bubble, the federal government recently cracked down on lenders and insurers through a series of reforms. Major changes already announced include a planned withdrawal of government guarantees for mortgage loans where the down payment is less than 5 per cent of the home’s value, and for those with amortizations of more than 35 years.

Yet while lenders are phasing out so-called zero-down mortgages, many are still offering buyers a similar option through the use of cash-back incentives in lieu of a down payment. This practice will be up for discussion this week, said Finance Department spokesman Jack Aubry.

Cash-back mortgages could be more contentious if lenders start using them to attract leveraged home buyers who otherwise cannot afford to buy – filling a void created with the loss of zero-down-payment.

This week, Toronto-Dominion Bank rebranded its No Down Payment Mortgage as the CashBack Down Payment Mortgage.

In an e-mail to brokers, TD Canada Trust said the product’s terms and conditions hadn’t changed.

Canada Mortgage and Housing Corp. (CMHC) has also said it will continue to offer a similar product, CMHC Flex Down. In fact, most major lenders have some type of cash-back or “flexible” down payment mortgage option.

In essence, the products aren’t much different than a 100-per-cent mortgage loan. The difference is that they allow buyers 95-per-cent financing through their mortgage, and the remaining 5 per cent down is paid by the bank in exchange for the borrower taking on a much higher rate. That’s usually the posted mortgage rate instead of the discounted rate available to most home buyers, which can mean a cost difference of 1.5 percentage points.

Since the mortgage loan itself meets the new 95-per-cent loan-to-value maximum, all but the 5 per cent in funds borrowed for the down payment is eligible for government backing, which protects the lender against the risk of default by the home buyer, Mr. Aubry said.

Cash-back products were available before the government changes and aren’t a new product emerging to fill a niche, said Joan Dal Bianco, vice-president of real estate secured lending at TD Canada Trust.

In fact, with more clarity from the government regarding the changes, which also include new credit score requirements and loan documentation standards, TD Canada Trust will reassess the CashBack Down Payment product to decide whether it is still appropriate, Ms. Dal Bianco added.

“For this particular product, I will be revisiting whether we keep it in the market or not once we have clarified things. We may pull this particular one, where it goes to the lawyer specifically for the down payment …”

Mortgage broker John Panagakos said he plans to steer his clients clear of cash-back mortgages.

The monthly payments and interest costs are higher than those of traditional mortgages in the early years, meaning little financial flexibility for stretched buyers, he said.

Instead, it’s worth it to wait and save the down payment or borrow it from a family member, he added.

“To me, this basically looks like no money down, but wearing a new suit,” Mr. Panagakos said.

 

Here is my take on this. Currently you can qualify for 100% financing with a 680 or higher beacon score amortize it over 40 years and also get a discounted rate of around 5.65%. However with the new rules your rate will be 7.15% and you are limited to 35 years. Say you buy a house for 200K with the current program your carrying costs will be 1,043.08 per month and with the new financing rules your carrying costs will be 1,284.14 per month. This adds 241.06 more per month to your debt service load. Sure you pay more in interest over the life of the loan, but if the consumer does not feel it over a monthly basis then what is the risk. Anyway options will still be available to consumers with good credit who want zero down, they just will have to pay out more to exercise those options. Thanks but no thanks!

Cheers,

Pat 

Death of 40-year mortgage!

I could not have said it better my self so here is the article in it’s entirety.

Cheers,

Pat

 

Entrepreneurs’ flexible finance scheme quashed

Tony Wanless, Financial Post Published: Monday, July 21, 2008

For sale signs lined up along the street on Country Village Landing N.E. for condos in this Calgary, Alta. neighbourhood.Dean Bicknell/Canwest News ServiceFor sale signs lined up along the street on Country Village Landing N.E. for condos in this Calgary, Alta. neighbourhood.

When Canada Mortgage and Housing Corp. (CMHC) recently announced it was no longer backing 40-year amortization mortgages, it presumably was attempting to put some order into the teetering housing and mortgage markets. In the process it quashed the hopes and dreams of thousands of Canadian entrepreneurs who had rallied to the new mortgage as a flexible method of financing small businesses.

The 40-year mortgage was initiated by lenders last year as home prices climbed to levels that put monthly payments out of reach for many homebuyers. The theory was that by extending mortgage periods up to 40 years from 25 years, lenders could keep monthly payments lower. This, when coupled with low down-payment requirements – usually about 5% – would keep more people in the mortgage market. But there was more risk involved, so they also required the mortgages be insured by CMHC. When that body removed its backing, it essentially killed the plan.

Many financial advisors detested the 40-year mortgage because the numbers involved were almost pornographic: Math showed it would triple the cost of a home if extended for the entire 40 years. They contended the new mortgage would draw the most marginal of homebuyers into the market, setting the system up for much grief if the economy wobbled. And when the U. S. subprime mortgage mess created an avalanche of foreclosure horrors, their visions became the conventional thinking.

However, many Canadians who flocked to the mortgage — about 40% of new mortgages last year were of the 40-year variety — weren’t the marginal homebuyers feared by economy watchers. They were entrepreneurs who had been hamstrung for years by the small business lending market and saw it as a flexible method for financing their businesses.

In Canada, about 56% of 2.2 million “employer businesses” employ one to four workers, commonly called micro businesses. About 2.5 million Canadians identify themselves as self-employed, and many of these people are treated as pariahs by a lending system that operates on a dependable repayment schedule, and so almost always ties a mortgage to a steady job. In contrast, self employed and micro business operators generally have variable incomes that are out of sync with the 9-to-5 world preferred by most bankers.

Previously, micro business operators were usually given the bum’s rush by lenders, and were either forced to go to the private market, or bring in tax returns to show they had dependable income. The latter works against proper business tax planning, which involves trying to get your personal income as low as possible.

As an example of this kind of convoluted lender thinking, I recall a situation where a Toronto couple who owned a successful business applied for a mortgage, and the husband who was listed as the owner was rejected because he was self-employed. But the wife was approved because she was employed by the business.

Any entrepreneur can tell you that small business operation continually has its revenue highs and lows. The 40-year mortgage was perfect for very small business operators because it aligned with their income patterns. Also, its flexibility allowed the homebuyer to make a low mortgage commitment that could be covered in lean times, but also allowed them to slap extra money on that mortgage when revenues were fatter. It also helped them to own an asset that could then be used to get a line of credit that micro business operators often use for operating capital.

By killing the 40-year mortgage, the CMHC and lenders were trying to protect Canadians from overextending themselves. Canadian authorities, it seems, are always quite willing to protect us from ourselves, especially when it comes to our ability to pay back their loans.

Yes, the 40-year mortgage was riskier for lenders than a conventional mortgage. But most entrepreneurs live with risk every day and have learned how to handle it. It’s often feast one month and famine the next, so they operate on a form of budgeting based on worst-case scenarios and treat everything above that as a bonus. By looking simply at the math, and not at the usage patterns or the primary buyers of these mortgages, lenders laid waste to one of the few financing methods in existence for this growing army of 21st-century small business operators.

— – Tony Wanless of Knowpreneur Consultants (www.knowpreneur.net), is a Certified Management Consultant who helps knowledge-based businesses with strategy, innovation and planning.

Mortgage insurers push to keep zero-down loans!

Garry Marr, Financial Post Published: Tuesday, July 15, 2008

Private mortgage insurers are pushing for ways to keep no-money-down mortgages alive and are set to meet with Department of Finance officials in the next two weeks to discuss possible options, sources indicate.

The move comes after Ottawa cracked down on mortgage practices that allowed consumers to enter the housing market with no money down and amortize their loans over 40 years. New rules that come into effect on Oct. 15 would demand a 5% repayment and shorten the length of amortization from 40 years to 35 years.

Sources indicate the country’s major private insurers, which control about 30% of the market, have told mortgage brokers they are working on a solution which would keep the zero-down option alive and even the 40-year amortization.

One insurer, PMI Canada, which has been in the market for about a year, indicated it hopes to come up with some alternatives.

“PMI Canada is still in the process of reviewing and analyzing the new mortgage insurance measures for industry and market impact. PMI Canada looks forward to meeting with the Department of Finance at the end of the month to better understand the new measures, after which we will be better able to make an informed strategic business decision as to whether or not we are able to continue to offer the 40-year mortgage insurance option,” said Janet Martin, chief executive of PMI Canada, in an email to the Financial Post.

An industry source said the private mortgage insurers are looking into creating a product in which the first 95% of a mortgage is backed by the government with the last 5% securitized independently by the private mortgage insurers.

The new rules from finance appear aimed as much at Canada Mortgage and Housing Corp., a Crown corporation that controls 70% of the mortgage insurance market, as its private sector competitors.

In the hotly competitive mortgage insurance market, CMHC has often been the aggressor in the marketplace. For years, the entire market was CMHC and Genworth Financial Canada which has controlled the other 30% of the multi-billion mortgage industry. In the last two years AIG United Guaranty, a subsidiary of American International Group Inc., and PMI have been trying to crack the market.

CMHC and Genworth both responded to the intrusion by insuring products with longer amortizations. CMHC’s decision to insure mortgages with zero money down ended up incurring the wrath of former Bank of Canada governor David Dodge two years ago.

Mr. Dodge feared interest-only mortgages were fueling the housing market and demanded a meeting with CMHC. Some industry observers say new rules put in place last week are the long awaited response to Mr. Dodge’s concerns, coming after months of consultation.

Now, the private sector is suggesting it wants to be excluded from the new rules. “It’s still a little early. We know the government won’t back the 100% program but will the private insurers do it themselves,” said Gary Siegle, Calgary regional manager with Invis Inc., a mortgage consultant firm.

“The [private firms] are looking at trying to do the 100% insurance themselves. Brokers have been told to wait a week for more news before they can find out how to proceed.”