Thursday, May 9, 2013

Are 30 and 35 year mortgages about to be banned in Canada?



Garth Turner is out this evening with intriguing speculation that Canada's federal finance minister is getting ready to end 30 and 35 year amortization mortgages in Canada.

As you already know, CMHC insured mortgages are now limited to 25 year amortization. But 30 and 35 year mortgages still exist, provided borrower's put 20% down and bypass CMHC insurance.

Turner asserts borrower's ability to do this is about to end:
Last week the CEOs of the monster banks were given a clear message that 30-year mortgages need to be wiped away. Completely. In fact, they’ll be banned. That letter will go out next week, the result of a decision made jointly by the Department of Finance, OSFI (the bank regulator) and the Bank of Canada. Regulated financial institutions will also be prevented from buying any securities which are made up on mortgage with 30-year ams.
Stunning news to be sure, and it's estimated such a move will shave 5-10% off already dismal real estate sales.

It continues the theme we talked about on Tuesday when the Financial Post that told us "the federal government and policy makers are scrambling to engineer a soft landing for the country’s overheated housing market."

It also adds credence to Marc Faber's recent comments that there could be significant depreciation in real estate values ahead.
Faber says... he’s observed a significant disconnect between selling prices of homes relative to what they really should be worth.

The precarious state of the housing market has made Canadian banks more risky investments. Dr. Faber doesn’t follow the Canadian banks that closely, but observed that Canada, like Australia, has higher household debt than in the U.S. “With the higher leverage in Australia and Canada, I think I’d be very careful about any lending institution,” he said.
The Federal Government is determined to unwind the housing bubble without raising interest rates, a move that would be harmful to the overall economy.

Is a return to a minimum 10% downpayment the next move for the Feds?

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22 comments:

  1. "Is a return to a minimum 10% downpayment the next move for the Feds?"

    I sure hope so....

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    Replies
    1. Like to see the 25 to 33% down.

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  2. Wow - didn't see this coming.

    Not really a fan of the government interfering in the free market like this - would far rather them keep their focus on ramping up the CMHC insurance limits.

    Garth does have a pretty strong track record with announcing mortgage rule changes, so I wouldn't be surprised at all if this comes into place.

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    1. "Not really a fan of the government interfering in the free market"

      "would far rather them keep their focus on ramping up the CMHC insurance limits"

      ????

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    2. Funny how people who supposedly aren't fans of government interference can still reconcile their POV with supporting the existence of CMHC.

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    3. "free market" - I didn't read beyond this.

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    4. I'm not sure how the existence of CMHC is "free market" in any sense of the word... if you want a free market, let's get rid of the taxpayer-backed insurance.

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  3. It’s about the finance minister eliminates 30 and 35 year amortization mortgages. Canadian households have become accustomed to the monthly cost of the mortgage payments. There is a total disconnect to the true cost of debt that people are accumulating. They are simply not afraid of the long term commitment that debt represents, or the consequences. As long as they can make their payments they will continue to borrow until they cannot. Flaherty should have taken tougher actions a long time ago and because he did not take more decisive action sooner, he should be held accountable for the resulting debt levels amassed by Canadian households. Most Canadians are simply not financially equipped to understand that leverage is a two edged sword. It can be very lucrative in a rising market but can financially ruin you when the market collapses. Unfortunately many households have not experienced the devastating effect of too much leverage in a declining market. They will soon find out.

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  4. It was a great party but nobody knew quite when to leave. The host cracked open one keg too many. Now he has resorted to throwing people out of the house, as sirens can be heard approaching from a distance.

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    Replies
    1. What a great analogy

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  5. When people make unwise decision with their money, they themselves should be responsible for the outcome - unless they were con'ed or provided misleading information.
    If CMHC was not there or is privately run, there is much less chance of a bubble and people can actually afford a house rather than leveraging 20:1

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    1. "unless they were con'ed or provided misleading information"

      Therein lies the problem. People have been duped on a massive scale by: RE industry, mortgage lenders, last not least government. "You too can afford that million-dollar house!"

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  6. So now Flaherty is going to crush all of those people he lured into 25 year + mortgages on renewal?

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    1. I don't think he can legally do this. The 30/35/40 year amortization mortgages will remain intact on renewal if you don't try to change financial institutions. Of course, you will be subject to the current rates set by that particular institution, without discount. When the borrowers realize the amount of "extra" interest they are paying with longer amortizations and higher rate of interest, I bet they will try to refinance anyways.

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  7. via CMT:
    [Update, May 10, 12:40 p.m. ET]: We've contacted the Department of Finance (DoF) for comment. Banking sources have confirmed reports of the DoF contemplating amortization guideline changes for conventional mortgages. But there's no confirmation on what, if any, moves will be made. Assuming the DoF acts on this issue, an alternative possibility is that conventional borrowers be made to qualify at a 25-year amortization, but still be allowed to set payments at a longer amortization.

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  8. 0 down 40 yr amort etc. was created to create a feel good boom prior to the election. Now they're trying to defuse da bomb and hope it won't blow up on them.

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  9. What's with this interventionist Government, anyway? If a bank thinks a person with 20% down is a good risk for a 35 year mortgage, then have at it.....as long as CMHC (i.e. the taxpayer) is left out of the picture, then why not?

    Next thing you know, the Feds will wanna intervene directly in labour negotiations between Crown Corps and their staff....ha-ha!

    Oh, wait....

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  10. In the early 60's, there were 30 year fixed rate mortgages available. Life expectancy has increased substantially, so I have no problem with 30 or 35 year mortgages. It won't make housing more affordable, but the .0001% will cash in some more.

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  11. Kabloona

    The reason the Government has to intervene to rein in the banks, regardless of the CMHC, is because these bozos have no self control AND they are too big to fail.

    This is not really a free market where risk is being assessed and bad decisions get punished. On the contrary, as we saw in the US and Europe, these banks will bet it all on black and then when they lose come cap in hand to the tax payer.

    Don't think it wont happen here.

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  12. I'm still not whether Flaherty really wants to slow the market down, or if it just has to look like he is trying.

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  13. Sorry, that should read "still not sure . . ."

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  14. SO! How much further are the prices going to fall over 2 years (20%?)? Anyone mentioned weakening CAD vs USD? CAD is to lose additionally 6-7 cents this year alone...Not even 8 years ago CAD was 70 US cents...Get your swimming suit ready - we are in for a dive!

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