OFSI confirms it's considering mortgage amortization changes

On Thursday we asked "Are 30 and 35 year mortgages about to be banned in Canada?", a question triggered by Garth Turner's reported inside information that federal Finance Minister Flaherty was about to implement this significant change.

The speculation has triggered a firestorm of interest in the real estate community.

And now comes confirmation that the Office of the Superintendent of Financial Institutions Canada (OSFI) is indeed looking at the issue of limiting amortizations to 25 years on conventional mortgages (those with 20%+ equity).

Canadian Mortgage Trends has verified this with the OFSI.

A spokesperson from Canada’s banking regulator, The Office of the Superintendent of Financial Institutions Canada (OSFI), verified that it is looking at the issue of limiting amortizations to 25 years on conventional mortgages (those with 20%+ equity). Currently, those “low-ratio” mortgages can have amortizations up to 35 years.

OSFI is “doing some preliminary consultation with financial institutions” on the matter, said the spokesperson.

Those communications appear to be behind the scenes with banks and federally-regulated trust companies. OSFI will not be issuing a public statement in the very near term (i.e., next week).

The regulator added, “We are working to determine the desirability of some changes given current conditions in housing markets and recent trends in household indebtedness.”

“A decision in that regard would be taken once we hear back from the industry. Any proposed changes to our mortgage guideline that may result from this work would be subject to a public consultation process.”

Officials from OSFI, the Department of Finance (DoF) and the Bank of Canada have been working together closely. Their aim is to stabilize housing, moderate debt levels and reduce economic exposure to rising rates.

When implementing the last set of mortgage changes in 2012, Finance Minister Flaherty made it crystal clear that he considers it “desirable” to make home buying more difficult.

In December, he told reporters: “Less demand, lower prices, modestly, in the housing market are much better for Canadians than a boom followed by a bust. So I'm all for a soft landing.”

But real estate has been more resilient than many expected. And some at the DoF are not satisfied that housing is slowing fast enough.

Presumably we will now see the real estate industry go into hyper-lobby mode to mitigate the changes as much as possible.

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Confirmation the rumours of banning 30-35 year mortgages true?

On Thursday we asked "Are 30 and 35 year mortgages about to be banned in Canada?", a question triggered by Garth Turner's reported inside information that federal Finance Minister Flaherty was about to implement this significant change.

This has caused quite the fervour in the real estate community, particularly given Turner's predictive track record.

The blog Canadian Mortgage Trends followed up on the rumour by contacting various banking sources. The Banks confirmed something was afoot. CMT then contacted the Department of Finance directly:

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.

CMT reports the Department of Finance responded:

"As a matter of course, the Department does not comment on what specific measures it may or may not be considering. However, we can confirm that no announcements from the Department of Finance related to uninsured mortgages are planned."

Given the indirect confirmation from banking sources, CMT ruminates:

Turner says the guidance would likely be sent directly from OSFI to the banks with less fanfare than a big public announcement. At least one bank we spoke with earlier is currently considering tightening conventional amortization rules. It's unclear if that is on the asking of OSFI or just an internal bank decision.

Clearly this unexpected turn of events has the real estate industry in a tither.

CMT speculates on the impact:

If true (with emphasis on the word "if"), this news could:

• Increase monthly payments on new conventional mortgages by about $53 per $100,000 of mortgage, other things being equal. 

• Potentially impact even smaller non-bank lenders (e.g., First National, Street Capital, MCAP,…). That’s because, as Turner adds:“Regulated financial institutions will also be prevented from buying any securities which are made up [of mortgages] with 30-year ams.” Virtually all non-deposit-taking lenders rely on securitization and/or selling mortgages directly to banks. 

• Make provincially-regulated credit unions the only game in town for amortizations over 25 years. That would provide credit unions who keep long-amortization mortgages on their balance sheets with another advantage versus the banks. CUs already sidestep federal mortgage rules by offering HELOCs above the federal 65% loan-to-value (LTV) maximum, higher LTV stated income mortgages and mortgages with lower qualification rates.

As noted, none of the above has been confirmed. So the above should be considered speculation until it is. We’ll do more digging and report back.

It could be an interesting week.

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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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