New Mortgage Rules

As I mentioned last week, the start of the Olympic Games would make it difficult for me to post on a daily basis and that's exactly what has happened. I have lots more Olympic pics for you, but I may stick them on a subsite and reference the link here.

The main news today is the new mortgage rules that the Canadian Finance Minister came out with.

In a nutshell (1) all borrowers must meet 5 year fixed rate standards instead of the previous standard of 3 years, (2) limit refinancing to 90% vs 95% of a home's value, and (3) require 20% down for speculative/investment mortgages that require CMHC insurance.

Comically Finance Minister Jim Flaherty said he is responding to growing concerns that Canada's housing market is overheating, but stresses there is no bubble in Canada's real-estate market.

"There's no compelling evidence of a housing bubble, but we're taking proactive, prudent, measured and cautious steps today to help prevent a housing bubble."

Riiighhttt!

We have a housing bubble and the government is scrambling to find ways to tamper the fire without putting it out.

As for discouraging speculation by demanding that prospective homebuyers who want to purchase a property for rental purposes will have to come up with a 20% downpayment, instead of the current 5%, Economists are already noting that it will be difficult for lenders to determine on which side of the line buyers fall.

And the creation of a test threshould of meeting a 5 year fixed mortgage rate? All this change does is limit the size of the mortgage you are going to be able to get; it doesn't prevent people from buying homes, it doesn't drive a lot of new homebuyers out of the market and it doesn't lead to higher payments.

Currently you can get a 5 year fixed mortgage for 3.75%. What kind of test threshold is that?

The infamous stress tests conducted by the Bank of Canada released at the end of the year tested current Canadian mortgages at a 4.5% rate threshold and found that 10% of all Canadians would be severely stressed at this level.

It all comes down to interest rates.

And on that front events are moving very quickly with the PIIGS, Dubai and the global demand for money. More on that tomorrow.

I steadfastly maintain that events will push intrerest rates levels to the historic norm of 8.25% AT THE VERY LEAST!.

That rate is almost double the BOC stress test rate that places 10% of Canadians in 'severe distress'. Recall that one morgage broker considers 8% to be a 'doomsday scenario'.

These are the same brokers, btw, who rationalized that anyone who receives a 5% down/35 year amortization mortgage "are getting them because they’re well qualified. It’s that simple."

Well... no it's not. And the fact that the Finance Minister's hand was forced into taking some sort of action proves that they are not well qualified.

But let's not kid ourselves. The new mortgage rules do nothing to address the dangerous and precarious position that a vast majority of current Canadian mortgage holders are already in.

When the global demand for capital pushes yields ever higher, the 'Canadian-housing-bubble-that-isn't' will trap all these Canadians and implode in spectacular fashion.

It's all about interest rates, and not the 5 year rates at a piddling 3.75% or 4.5%.

Interestingly, Minister Flaherty took a small jab at lenders in his release today, saying these rule changes are designed to “help prevent some lenders” from “facilitating” irresponsible lending.

Nice of you to finally admit that this exact problem already exits, Jimbo. The problem is... irresponsible lending has already created a collossal mess. And there is only one way that mess will be unwound.

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Email: village_whisperer@live.ca
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Pass the Salt!

Yesterday shortly after I commented that, in the CHMC world, there is never an outlook that isn't sunshine, lollipops and rainbows - the Financial Post echoed the sentiment: CMHC forecasts are best taken with a large grain of salt.

• "What do we find so beguiling? Must be the gentle mix of fact and whimsy. No matter what the situation, a CMHC forecast is always soothing, always positive, always upbeat about real estate."

Speaking of beguiling, did you get a chance to check out this link posted by a faithful reader in the comments section yesterday?

We are treated to 'the good news' about cheap money from a couple of mortgage brokers. Even better, this website has been cited as "first and foremost an up-to-date source of unbiased mortgage advice and industry trends."

The good news offered is in response to media stories about the Bank of Canada's warnings about interest rates. Thus, "13 reasons why low rates and current lending guidelines might not be a disaster in the making."

In one, the Company insists that anyone who receives a 5% down/35 year amortization mortgage "are getting them because they’re well qualified. It’s that simple." (Presumably Mark Carney can cancel his upcoming study).

Then they promptly follow that up with an assertion that some of those 'qualified' borrows aren't actually qualified (huh?). They tell us, "as a side note: The frequency of lender “exceptions” (lenders overlooking guidelines) are nowhere near where they were pre-August 2007."

Didn't they just say anyone who receives the 5/35 mortgage is qualified, "it's that simple"?

The other 13 'points' reference dubious data, but the one that stands out most is the last in which we "suppose a doomsday scenario unfolds and rates rise 4% (to say, 8% on a 5-year fixed). If the average household income is $61,800 today, and the mortgage is $250,000, that would necessitate a $10,400 pre-tax income jump in five years to pay the extra debt service. That’s just over 3% annual wage growth—not an unreasonable earnings growth assumption."

No worries, right?

Well, not exactly.

First off, are we to understand that doomsday for these guys is interest rates rising to 8%?

You're joking. Even the Bank of Canada is telling Canadians to expect interest rates to go back to normal... and normal for the last 20 years is 8.25%

And who among those who bought a single family home in the Lower Mainland in the past three years (where where the average detached home is selling for $914,000) has a mortgage of only $250,000?

The whole article gives new meaning to the phrase 'skewed analysis viewed through rose-coloured glasses'.

And since we're on the topic of reality checks, Australia announced yesterday that they are raising interest rates for the second consecutive month with the central bank raising their key rate 17% in the last 60 days.

Higher rates are coming. Bank of Canada Governor Carney knows it, which is why he has been sounding alarm bells the last few months.

And one only has to look at US Government debt to see the scope of the pressures that loom on the horizon.

America must roll over $3.4 trillion in debt over the next four years. This $3.4 trillion does not include any additional borrowing that may be required for other government programs (wars, healthcare, wars, school lunches). Unless the US rediscovers fiscal prudence, annual deficits of $1.4 trillion mean the United States faces the prospect of having to find $9 trillion to fund it's budgets.

There are only so many savings available to borrow, after all. And the competition for capital is going to force rates up to late 1970s levels.

And what will happen if America can't find anyone willing to finance its deficits?

One of the luxuries of issuing debts in the currency you happen to also print currency is that you can print money to pay for them. Technically the Fed can create new money to buy debt issued by the Treasury, funding deficits ad infinitum.

Which is why so many people are fretting about the United States monetizing the debt and why gold hit $1,084 an ounce yesterday (at the time this was written, gold had hit $1,092 on the kitco 24 hour chart).

You have to laugh at the idea that 8% interest rates are a doomsday scenario.

In 1975, an 8% five year mortgage rate would have been considered ridiculously cheap and it's not hard to see how that will be the case again before too long.

Seems to me we need more than a simple grain of salt to take with these 'don't worry, be happy' rationalizations.

Pass the shaker and pour it on, baby.

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Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.