Any move to increase minimum equity requirements for HELOCs could block vulnerable clients from consolidating debt and remaining in their homes, said an agent, also concerned those changes fail to address unsecured credit.
“This guideline change (moving the equity minimum from 20 per cent to 35 per cent) would create an artificial crisis by removing the recourse some homeowners now have to consolidating unsecured, high-interest debt into secured, low-interest debt,” said Ad Lakhanpal, an Oakville-based broker with Mortgage Alliance. “Lenders are already asking borrowers questions about what they intend to use HELOC funds for to ensure it’s not being abused.”
The comments jive with those of other brokers reacting to proposed guideline changes now being floated by the Office of the Superintendent of Financial Services. The watchdog wants to lower the maximum loan-to-value of uninsured home equity lines of credit to 65 percent from 80 percent.
Ostensibly, the move would discourage what many consider the irresponsible use of HELOCs to fund non-essential spending – outside the borrower’s economic means.
OSFI is now seeking industry input on the guideline change, among others meant to increase bank responsibility for underwriting decisions.
The HELOC change is simply unnecessary, said another broker.
“I generally resist the notion that OSFI needs to tell lenders how to run their businesses in the absence of any evidence that HELOCs pose a material threat,” Gord McCallum, owner of First Foundation Residential Mortgages, told MortgageBrokerNews.ca. “The federal government already instituted tougher guidelines for qualifying for HELOCs and lenders already use stricter lending guidelines, including net worth tests, property valuation tests, and credit scoring to ensure that HELOC borrowers are the best of the best.
“Lenders also have the ability to freeze credit lines or call them if borrowers don't fulfill the obligations of their agreement - such as maintaining a minimum credit score.“
If OSFI can’t be persuaded to re-focus its energies on unsecured debt – what Lakhanpal views as the real threat to consumer solvency – it should maintain the current equity threshold but limit HELOC use for consolidation, renovation or to fund other constructive objectives, he said.
“Perhaps gambling and vacations could be excluded,” said Lakhanpal, “but not debt consolidation.”