Thursday, June 21, 2012

Thurs Post #1: Interesting Times

The third week of June, 2012 is rapidly turning into 'the week that was'.

Will we look back at this as a major turning point in our housing bubble?

It started off with the Vancouver Sun outlining upcoming changes for CMHC mortgages by the OSFI. A barrage of negativity hits the mainstream media telling people to prepare for changes like:
  • Home Equity Line of Credit mortgages reduced from 80% financing to 65% financing.
  • Lines of credit to be either amortized, or amortized after a specified period of time.
  • More stringent income requirements for self-employed borrowers.
  • All mortgages to be reviewed upon renewal (currently as long as payments are made, it is unlikely for a bank not to offer a renewal to a client).
  • Funds from cashback mortgages are not allowed as a source of down payment
  • Use of the five-year posted “benchmark” to qualify uninsured terms of one to four years and all variable terms (currently most lenders use a three-year posted or a lower rate to qualify uninsured mortgage).
  • More limits on underwriting exceptions.
  • Home insurance to be included in debt-servicing ratios (it is currently not included.)
  • More public disclosure of statistics pertaining to institutions’ mortgage practices.
  • More accountability from management to ensure lenders are adhering to their underwriting guidelines.

These measures being discussed in the media are, by themselves, enough to create a stir. But that was just primer for the next round.

Canadian Mortgage Trends fired off a tweet earlier today which proclaimed: "What the industry didn't want to happen, happened"

And what are they referring to? What is the dire news they didn't want to happen?

CMT announced that the former No. 1 lender in the mortgage broker market announced that they are closing their doors to new business as of July 31, 2012.

FirstLine, a broker lending subsidiary division of CIBC, was put up for sale earlier this year but a deal could not be closed.

A source familiar with the discussions told CMT: “The buyer struggled to come to a deal that made sense so CIBC chose to let FirstLine die a natural death on its own."

This was a development CMT says marks "a moment of truth for the broker market."

But if that weren't enough, press reports last night confirmed what we alluded to yesterday. Specifically Ottawa is tightening up on mortgage rules.
"The country’s biggest banks were caught off guard on Wednesday night as the Department of Finance prepared to clamp down on mortgages by reducing the maximum amortization for a government-insured mortgage to 25 years from 30.

Ottawa will also limit the amount of equity that can be borrowed against a home to 80 per cent of the property’s value, down from 85 per cent.

Ottawa will announce two other changes, according to a source. It will no longer allow high-ratio mortgages over $1-million, and it will cap the gross debt service (which looks at a consumer’s total debt payments as a percentage of their income) at 39 per cent.”
The third week of June 2012.

I suspect we will be looking back on this as a significant signpost on the road that was the Canadian Housing Bubble.


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  1. "Ottawa will announce two other changes, according to a source. It will no longer allow high-ratio mortgages over $1-million, and it will cap the gross debt service (which looks at a consumer’s total debt payments as a percentage of their income) at 39 per cent.”

    OK. That is really interesting. These last two items which are getting less attention than the amortization period change are really targetting the mortgage business in Vancouver and Toronto. I don't know if it gets more dramatic than this. Off the top of my head I also don't know how any lending will proceed in the bubbly cities as debt servicing ratios this low means taking housing prices back in time quite a few years. If that is saying 39% of a consumers income is the maximum qualified amount then down payments are going to have to get a lot bigger before anyone buys or prices will have to come down sharply.


  2. Also sorry if I missed it in your article but they wont insure (CMHC) houses worth a million or more. Can you say price slide in Vancouver.
    It will be interesting to see how quick this impacts the market. I think though for the next week or two there is going to be rush to get deals done as this goes into effect early July DG

  3. There is a huge problem with what they have done. By insuring mortgages over $1 million requiring 20% down or more, and requiring debt ratios to be under 39%, people will be giving up their life savings for their down payment. If things continue to erode across the world and job losses increase in Canada it will result in a lot of people in a very tough place because they will have zero nest egg or oh sh1t funds. Of course the banks will be safe from foreclosures because they have been insulated by the tighter regulations, but the consumer is much worse off. Not good at all.

    1. "people will be giving up their life savings for their down payment"
      Or prices will come back down to earth. Doh!

    2. Well prices are going to go down, quickly. The problem is people are going to be catching the falling knife, giving up all their saving to get IN and quickly will find themselves maybe not underwater, but with no equity and no savings.

      It seems to me F is underestimating the problem thinking, or at least acting, like they are on the leading edge and being proactive. But they are on the trailing edge and probably just making things worse. These changes would have been better off years ago, or after things have reached an equilibrium. Instead of making a small pin prick letting the air out it's going to just pop.

    3. It's only a three week window. No one is going to be smart for the homebuyers under any circumstances, current or future, everyone around them is out to get a cut of the action. Homebuyers should really just wise the heck up no matter the mortgage rules.

    4. @GG, you are totally right. When I lived in the states during the boom the social pressures and nature of the RE agents and banks were nowhere near the predatory nature they are here. It's astonishing to watch this again like ground hogs day. Not like anyone has a gun to their head, but people are constantly reminded of it, jammed down your through, and made to believe that this is how you get ahead in life, if you don't get in now you will be priced out forever. People sign the dotted line thinking that no matter what they will make money. Most of the world has found out this is not the case.

      What is the saying? "Everything comes to Canada two years later"

    5. "By insuring mortgages over $1 million requiring 20% down or more, and requiring debt ratios to be under 39%, people will be giving up their life savings for their down payment."

      -- This is a statement of risk and if it's too risky for a person to put their own money down towards the purchase, then it's too expensive for their own personal situation. There should be reasonable limits to moral hazard the government makes available in pursuit of other goals. One could argue rightly, that $1MM is way too high a limit for CMHC insurance and also that if someone is actually needing to expend 39% of their income towards debt financing that they are way too over extended. 39% represents on an individual basis a huge amount of money to service debt.


  4. Off topic, but relevant to the bigger picture:
    Oil under $80, silver under $27, DOW down 250, TSX down 351. Is the smart money running for the exits? Do they know something?
    I know Whisperer is a huge silver fan (misplaced adulation at $50, IMHO, but $27 is kinda different).
    I do believe Whisperer doesn't give enough weight to the amount of leveraged speculative money in both silver and gold, which is immense. And those speculators don't want physical metal, paper position levered up suit their purposes just fine, that is why the huge gulf between paper positions and physical stocks of PMs don't excite me.
    However, when the levered speculators get margined out by drops like we are seeing in oil, gold and silver the price of both the imaginary paper positions and the real thing can get squashed down far below where it should really be.
    So what is the point to buy them, not the fundamental value but the point below that which is reasonable to expect a meltdown like what we may be seeing the start of to result in?
    Oil hit around $40 in the big meltdown, I wouldn't be surprised to see that again. Silver and gold? I dunno, but I am curious. Many people say there is strong technical support at $24-ish for silver. I have some dry powder waiting.

    1. I was not there...I do not know what was said....but something big happened behind the scenes at the G20 that has really shaken up markets.

      I am sure we will all know in good time.