Brokers: Leave HELOC rules alone

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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 “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.”

  • Ross Taylor on 2012-04-11 3:32:11 PM

    Not too many people will cite gambling as the reason they need a HELOC, but otherwise these are all valid points.

  • Paul Therien on 2012-04-12 2:55:05 AM

    I believe that HELOC's have a place in some situations, but I have seen far too many instances where a customer is coached to go into a HELOC for the wrong reasons... and coached this direction by very experienced brokers from across Canada.

    In 22 years, most of which I spent on the lender side, I saw far too many people who were in a HELOC that only made the minimum interest only payment, and too many of them obtained the HELOC as a way to resolve unsecured debt woes. Interest may be lower on a HELOC but if not managed properly they can be jsut as detrimental to the financial well being of the consumer as unsecured credit. Yes it might be lower interest, but if all you pay is interest only payments, there is no improvement.

    If you really want to help your clients resolved unsecured debt, then ensure that they are putting that debt into a program that allows them to pay it off in a timely manner, instead of taking them off of one treadmill and putting them to another.

    People who are credit challenged due to excessive debt do not realize long term financial stability by simply moving debt from one place to another - particularily if into a HELOC. 80% of all consolidations result in higher debt loads withing 36 months of the consolidation happening.

  • Ad Lakhanpal, Mortgage Broker, Mortgage Alliance on 2012-04-12 3:04:01 AM

    In addition to looking at the possible harms, the benefits of HELOCs should also be acknowledged. I have helped many clients avoid consumer proposals or bankruptcies by mobilizing the equity in their homes via HELOCs.Their other option would have been to sell their house to access their equity. All of these are undesired options, when HELOC may be a perfectly good solution. Payments of $1500/mo for a $50k credit card debt can be reduced to less than $500/mo with HELOC. This may allow people to survive and slowly pay down their debt.

  • Paul Therien on 2012-04-13 2:16:34 AM

    In reply to: Ad Lakhhanpal... True that when you move them into a HELOC from a CC their payments lower, but their debt does not reduce faster by also reducing the payment by 2/3 - remember most HELOC products are interest only, are compounded at the same rate as mortgages, etc. If all a customer does is make the $500 payment... they are not resolving their credit woes.

    Prudent budgeting, strong financial councelling, in combination is what is needed, not just a simple debt consolidation.

  • Ad Lakhanpal,Mortgage Broker,Mortgage Alliance on 2012-04-13 2:45:41 AM

    Paul, you are absolutely correct. It is not a long term solution. However, if someone has a heart attack, the doctor may have to perform immediate surgery to save his life. Life style counseling can follow. Can you imagine the doctor not being "allowed" to perform surgery on the pretext that the patient brought the condition on himself because of poor life style choices?

    Our primary job is to find a financial solution to resolve a client's problem. Guidance and counseling is additional service that we provide, but that is not why clients come to us in the first place. There are other people who are dedicated to providing such services.

    Lets fight to retain the "tools of trade" which allow us to perform our primary job.

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