Flaherty: People getting mortgages that would be unaffordable when rates go up!

Interesting comment from Federal Finance Minister Jim Flaherty on Tuesday.

In an interview, Flaherty said that sources in the financial industry, as well as developers, had been telling him that:

“the situation was evolving where expectations by purchasers were excessive with respect to single family dwellings, and ultimately unaffordable when mortgage rates go up.”

This little revelation should drive a stake through the hearts of groups who are hoping that Flaherty will look at the declining sales in the Vancouver and Toronto markets and loosen up on the recent changes to mortgage regulations.

Flaherty even went so far as to say:

“I’d rather see some softening in the markets, particularly in Toronto and Vancouver, than have a rapid decline."

You may recall the post we made a week ago about Peter Simpson, president and CEO of the Greater Vancouver Home Builders’ Association.

Simpson was optimistic that "Finance Minister Jim Flaherty may intervene in amortization period for home mortgages"

Simpson said:

“I hope he looks at markets where affordability is already an issue, like Vancouver."

Simpson was deeply troubled by the dreadful summer real estate market. And while builders are trying to rationalize that during the summer months home sales traditionally slow down - the reality is that this summer's sales have been horrendous.

There is valid concern that if the monthly sales volume continues to tank after the Labour Day weekend, the situation will become dire for home builders.

Enter Simpson's attempt to exert a little public pressure on Flaherty:

"The real threat to the economy is if a real-estate slowdown leads to a sharp reduction in housing starts. That’s because new-home construction stimulates the sale of appliances, carpets, and other products. For every housing start, there are 2.8 person years of employment that are create.That’s direct and indirect jobs. If it continues to fall, they’re going to have to take a good hard look at what their actions have caused — and be prepared to make some adjustments. ”

Unfortunately the statements made yesterday by Flaherty reinforce that the Conservative Government knows all too well that they cannot turn back from the recent mortgage rule changes that eliminated the 30-year mortgage and directed CHMC to stop offering insurance on mortgages for any house selling over $1 million.

Simpson will no doubt be quite dismayed that those changes are just the start... more changes are on the way.

The Office of the Superintendent of Financial Institutions (OSFI) are about to mandate far-reaching changes in how big banks make real estate loans.

Beginning October 31st,  home equity lines of credit will be trimmed again.

The amount you can borrow from the value of your homes will be reduced from 80% to 65%.

If you want to borrow more,  the amount between 65% and 80% will have to amortized like a mortgage. 

This will have a significant impact on groups like the Greater Vancouver Home Builders’ Association because the primary uses of HELOC money goes toward renovating houses and buying rental properties.

In addition to this, mortgages will be made harder to get. The OFSI will require borrowers to qualify to “the greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada.” That's a huge change from qualifying for the Variable Mortgage Rate.

The OFSI will also eliminate cash-back mortgages, a kick-back cash-cow for new homeowners equal to the 5% downpayment required to get CMHC insurance.

And, finally, liar loans will be eliminated.

History tells us all booms created by excess credit will ultimately bust.

CMHC has grown from $100 Billion in mortgages in 2006 to an astounding $600 Billion in 2012. Excess credit... it is what created our housing boom.

And now that stimulus is being choked off.

Shorter mortgages, higher rates and tougher borrowing... all resulting in less credit.

It doesn't take a crystal ball to foresee the cumulative effect this will create.

The howls of complaint from developers and realtors have only just begun. But Flaherty knows the alternative is worse.

“I’d rather see some softening in the markets, particularly in Toronto and Vancouver, than have a rapid decline."

Rapid or not, a decline is coming.

All booms created by excess credit always bust... always,

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Homeowners Beware

Homeowners Beware!

That's the ominous intro to the above newscast story on the upcoming changes to Canadian bank regulations.

We have discussed this topic a couple of times (and it's something I raise with colleagues regularly).

The OSFI – the Office of the Superintendent of Financial Institutions - is the organization which regulates Canadian banks.  In the early part of the year they released an announcement about upcoming changes to banking regulations.  This was followed by a  discussion paper on those changes.

It's the common procedure for changes implemented by the OFSI.  And rarely are the implemented changes all that different from those outlined in the discussion paper.

Hence the news story.  Some of those changes are HUGE.  And they will be implemented by the end of the year. The OFSI wants banks to tighten up when it comes to renewing your mortgage.

• They want verification of a home’s true value (not the bidding-war price).
• They want the elimination of cash-back mortgages.
• They want to make sure that when your mortgage is renewed you would still qualify for that mortgage.
• And most importantly... they want your loan-to-value ratio to still be intact when your mortgage renews.

In a rising real estate market this is never a problem.  But there are markets where values have fallen (hello Okanagan and Vancouver Island).

And in the Lower Mainland, as inventory hits seasonal highs, as the flood of Asian buyers evaporates, as the Spring Market disappears and sales plummet... are price drops all that far off?

Garth Turner provides a striking example of how this could affect everyone:

"If you bought a $400,000 place in 2010 with 5% down, then your mortgage is $380,000 and your LTV is 95%.

If the same place is worth $340,000 in 2015 (after a 15% correction) when the loan renews, then the LTV means the maximum loan is $323,000. If you took a 3% VRM when you bought, with a 30-year amortization and made 5 years worth of payments, then (counting in the mortgage insurance premium), you still owe $349,000 upon renewal. So, you’d have to come up with $26,000 in cash to maintain your home loan – after spending $101,457 on mortgage payments.

Let’s see, that’s a downpayment of $20,000, plus $101,457 in payments, plus a $26,000 mortgage renewal payment – or a total of $147,457 in cash for a home worth $340,000 on which you still owe $323,000.

This is a nice, simple example of why all those horny young virgins with their 5% downpayments are at risk of being wiped out financially."

For years everyone has assumed that the banks will renew your mortgage without question.

It is a topic we have raised numerous times on this blog and anytime we have raised the issue with local banks we have received vague, noncommittal answers.

Well... the OFSI is now making sure we have an answer to that question.

And the mainstream media is starting to spread the message.

Homeowners Beware!

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.