B-21 to erode credit union competitive advantage

by |
In a guest blog exclusively for MortgageBrokerNews.ca, Daniel Lewczuk of Mortgage Intelligence examines how credit unions -- who heretofore have enjoyed a competitive advantage over banks and monolines -- will be affected by OSFI's B-21 guidelines.

In 2012, the Office of the Superintendant of Financial Institutions implemented new underwriting guidelines that all federally regulated financial institutions had to adhere to. Beginning Nov. 1, 2012, B-20 negated the ability of banks and other FRFI’s to offer:

• 100% financing on mortgages
• 80% loan-to-value home equity lines of credit (this limit dropped to 65%)
• A lower qualifying interest rate for variable rate mortgages (the posted BOC 5 year rate was now used for qualifying)
• Looser rules for self-employed borrowers

This created a major advantage for financial institutions not regulated by OSFI, namely, credit unions, which are provincially regulated. Credit unions in Ontario could still offer 100% financing, 80% LTV HELOCS, lower qualifying rates for conventional variable rate mortgages, and higher loan-to-value on stated income mortgages for self-employed (up to 80%), rather than the new maximum LTV of 65% at FRFI’s, without requiring default insurance. These advantages have lasted until this year, 2014.

In April 2014 OSFI announced the B-21 guidelines which will affect mortgage insurance underwriting eg. any high ratio mortgage or other mortgage insured through CMHC, Canada guaranty, or Genworth. These adhered to earlier B-20 recommendations, and now the mortgage insurers, who are governed by OSFI, were told to follow them. The B-21 guidelines were lauded as conservative, in-line with earlier rule changes, and very sensible. The new guidelines will, however, erase some significant advantages which credit unions, up until now, have held.

This means that credit unions will not be allowed to offer 100% financing any more.

Credit unions will still be able to offer 80% maximum LTV on HELOCS, and they will still be able to qualify conventional variable rate mortgages using a much lower rate (usually the 3 year fixed rate, 5 year discounted rate, the contract rate, or a modification of the contract rate). Self-employed borrowers will still be able to obtain stated income mortgages up to 80% LTV without default insurance. Many, however, would argue that the credit union’s rules for conventional stated income mortgages are more onerous than certain insurer’s rules for insured stated income mortgages, and that there is not a significant advantage for the self-employed at credit unions, except in limited situations.

The B-21 guidelines are still in review, however, implementation is imminent and these rules could be in effect in a few short months. Where these guidelines could be most impactful is with first time buyers who do not have a full 5% down payment, nor have access to either borrowed funds or gifted money for their down payment.

The biggest advantage remaining with the credit unions will be their ability to provide HELOCS at 80% to borrowers.  Still, a significant advantage of the credit unions, the ability for borrowers to purchase a home with little or no down payment, will be disappearing.
  • Broker on 2014-06-26 11:26:03 AM

    "This means that credit unions will not be allowed to offer 100 per cent financing any more. High ratio variable rate mortgages will also have to qualify using the BOC posted 5 year rate."

    Check your facts.

    Nothing in B-21 prevents a credit union from giving a borrower an unsecured line of credit for the 5%.

    All insured variables are already qualified at the Bank of Canada posted rate, regardless of whether it's a credit union deal or not.

  • Bud Jorgenson on 2014-06-26 11:57:03 AM

    What the credit unions can no longer do is the cash back flex down which they had been doing a lot of. As brokers we can, and have always been able to use the unsecured loc for the down payment so in this regard the rules have leveled the playing field for brokers.

  • Max Cafissi on 2014-06-26 1:45:46 PM

    Personally, I don't think anyone should be allowed to Purchase a home if they don't have at least 5% of their own funds as a Down Payment, so this change is long overdue. I have never Financed a home 100% and I have been a Broker since 1989. If you can't save 5%, or get a Gift from your Parents, you shouldn't be Purchasing a home.

  • Daniel Lewczuk on 2014-06-26 5:26:16 PM

    Thank you for your comments.

    You are correct regarding the qualifications for high ratio variable rate mortgages; what that line should have read was, Although using the BOC posted rate to qualify high ratio variables, credit unions use a 3 or 5 yr. discounted fixed rate, the contract rate, or a marginal modification of the contract rate to qualify conventional variables, which is usually quite a bit lower than the BOC 5 year posted rate. FRFI's use BOC's posted rate even for conventional variables.

    With regard to using a 5% unsecured LOC for down payment, however, this is the flex down program. It is a workaround, and this program will remain. The 0% down program, which was referred to in the article, is a bit different, and it will disappear.

  • Broker on 2014-06-26 6:05:58 PM

    "The 0% down program, which was referred to in the article, is a bit different."

    0% down (cash back down payment) programs use the same Non-Traditional Down Payment guideline as "Flex Down."

    The only difference is that one uses cash secured against the property and one uses an unsecured loan. It's still 100% financing any way you slice it.

  • Angela Wong-Liao - Invis Inc on 2014-06-27 1:18:41 PM

    I fully agree with Max Cafissi, if borrowers cannot have 5% savings or gifted funds for down payment, they are NOT ready to move forward purchasing.

  • LanceH on 2014-06-28 11:03:52 AM

    Max / Angela. You're both basing your views on "ideology". Especially during boom times, and clients can't save as fast as prices rise, $0 Down makes huge sense!! I've had clients end up with 100k equity in a few short yrs, where the "savers" were still sitting on the sidelines!! Also, paying 5%, rather than the discount rate, they're in a better position to weather a rate increase, as they were already paying it!!

  • Paul Therien - CENTUM on 2014-06-30 12:14:06 PM

    With respect to those that are arguing in favour of the 0% down mortgage, I have a question... if a consumer is not able to save money to purchase the home, how will they deal with a major life change? Economic down turn? Major home repair or condo assessment?

    The mentality of the consumer in Canada has dramatically changed over the past 15 years from one of balanced household economics to one of rampant spending.

    Household savings are finally starting to improve, but we are still way behind the 8 ball. Most Canadian households could not survive any major downward pressure on their income. Asking that a consumer has some "skin" in the game when they purchase a home is simply sound economic planning for that consumer.

    As for growing equity in the home, that is assuming that the value of homes will continue to increase at high rates year over year. That is not always going to be the case - as has been demonstrated time and again.

    This is also not just about equity in the home, it is about the consumer making an investment in their future.

  • LanceH on 2014-06-30 12:30:23 PM

    An understandable argument, but a false one non the less. The rate of foreclosure on $0 Down purchases is only a tinsy winsy bit higher than those with skin in the game. Don't forget, $0 Down requires closing costs, which, in expensive cities like TO, is tad more than chump change. Also, the ratios still have to work. So they're not really at any more risk than any other buyer. Personally, I press the marginal clients to get something with rental income in case they ever need it. In 11yrs, I've never had a $0 Down client forced to sell. I've had 2 clients forced to sell, one was 20% down, the other was 15% down.

    Frankly, I see the problem as something entirely different. Planning. Parents don't teach their kids to plan their futures. They meet someone, have kids, then go . . oh, I need a bigger place! Oprah said it best; 1st u get your education, then your career going, do some travel, buy some real estate, then find a partner, then get married, then have kids. I did it that way, and it works!!

  • Paul Therien - CENTUM on 2014-06-30 12:48:47 PM

    LaneH - with respect my argument is not a false one. It is one that is based on over 23 years experience as a lender, a broker, working in land titles, and managing foreclosures.

    Yes the foreclosure rate is low, and yes thus far Canada has been blessed with a strong economy while the rest of the world continues to struggle. Spain for instance still has 20+ % unemployment.

    In business it is said that you always plan for the bad times, never the good. The same applies to sound household economics. Plan for the bad times, so that if or when they arrive, you are prepared.

    You made the comment about kids need to plan their futures. My argument was one in the same.

    "Asking that a consumer has some "skin" in the game when they purchase a home is simply sound economic planning for that consumer."

    Closing costs are not an investment in the home, they are a function of owning a home.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions