Debt-servicing changes stir brokers

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A move by two lenders to change their calculations on debt servicing ratios vis a vis unsecured lines of credit is raising broker eyebrows.

“It is extremely frustrating that instead of going after changes made to how easy it is to obtain unsecured debt that it keeps getting harder to apply for a mortgage,” says Jason Friesen, with Premiere Mortgage Centre. “Financing a mortgage is becoming harder and harder and if this change in policy is widespread it will impact borrowing significantly.”
Both Street Capital and First National recently changed their lending guidelines to include using 3 per cent of the balance of a credit card or line of credit in calculating a client’s debt servicing ratios. That represents a change from using just the interest-only payment to determine monthly debt levels. They are now also making clients use a payment in their qualifying ratios for secured lines of credit, even if the line of credit is at zero balance. 
 “The implications of this change in underwriting could be huge if it catches on with all lenders,” says Friesen. “I feel using 3 per cent of the balance on unsecured lines of credit and loans is a very smart thing to do, if you are barely qualifying at today's historically low rates and based on using the interest only payments on your debts then you likely should not be taking out the mortgage you are applying for. What concerns me is that using a payment on any secured line of credit based on the limit but not the balance will have a serious impact on people.”
Friesen uses the example of someone who has a $500,000 line of credit.
“In their monthly liability this would be over $1,900 as a monthly payment from what the lenders are doing,” he told “Take for example a parent who wants to help co-sign for a child. The parent has paid their own $500,000 mortgage off, but have a $500,000 line of credit remaining. Even though they have no intention of using the line of credit, they can't help their child qualify because of the payment that the bank must use.”
Finance Minister Jim Flaherty has issued several statements on his concerns of rising personal debt levels among Canadians and how it is adversely affecting the economy, while showing his pleasure that last year’s tightening of the mortgage regulations are having their effect in cooling what was an overheated housing market.
  • Ron Price/DLC on 2013-05-23 9:30:37 AM

    Clearly both FNat and more surprisingly Street are out of touch. Apparently MCAP has also adopted this new policy. Thanks lender 'partners'.
    Do we need a revolution of the masses in order to have the 'real problem' of easy, high interest, unsecured credit addressed?
    Come on Flaherty, it's about time you step up to the plate.

  • Earl Smith, AMP TMG-The Mortgage Group on 2013-05-23 9:38:58 AM

    I have to agree that this is a concerning practice. Using the credit limit as the basis for the secured LOC payments will really impact parents co-signing to help their children buy their first home. In fact I have to review a previous pre-approval right now that is just such a case and I don't think the numbers are going to work now. This will impact a large number of people that are sitting on large HELOC's that they are using very little of.

  • Kim M/Mortgage Architects on 2013-05-23 9:44:09 AM

    I agree Ron, my issue is with the government's strict intervention on mortgage lending (a persons safest borrowing product) and ignoring the easy, high interest, unsecured credit (like you said). With all our regulations, why can MBNA (or the like) set up a booth at a football game and get teenagers into a $5000 credit card at 26%??? I don't see the logic.

  • Christopher on 2013-05-23 9:48:58 AM

    That's why we're called 'brokers'. If this forces more agents to use more than a couple of lenders to get volume bonuses at the expense of their client's best interest, then that's a good thing.

    That said, MCAP and the rest will reverse their positions pretty quickly when their business starts to fall. These decisions should be made on a case by case basis and not for all applicants.

  • Hogwart Grad on 2013-05-23 9:57:22 AM

    I applaud both FN and Street. If the finance minister isn't going to do something about this excessive unsecured debt limits then the lenders clearly have to. The idea that you have to pay something down to qualify. We all know that the client is told that after it closes you can run it back up. Well should you not tell the client in each and every case that "Sir you qualify for this mortgage but these credit cards and that line of credit that you have could be potentially dangerous if you use them simply because you do not qualify." How many good brokers out there tell their clients to get rid of the cards cause you will be over your head?
    Folks this has to be done!!!

  • Ron Price/DLC on 2013-05-23 10:01:51 AM

    Right on Kim and thanks for yours.

    To Howarth Grad who doesn't care to give his or her name, but it sounds like a 'him' we always tell clients with too many credit cards to put them in the deep freezer and just use one that they can pay off every month.

  • Rick R / Mortgage Mentor on 2013-05-23 10:07:03 AM

    There are more than just those 2 mentioned lenders that have adopted that guideline. A few are also using fixed percentages on department store cards. More stringent yet is a few lenders using 2% or 3% of credit card APPROVED LIMIT in their TDS calcs. Brokers need to have a good program that tracks this for them. (we do!)

  • Paolo Di Petta | on 2013-05-23 10:57:33 AM

    Clearly they're worried about people borrowing from Peter to pay Paul. And rightfully so. There's been far too much serial refinancing and now that housing market is starting to turn, they're tightening up.

    Also, @Christopher - I don't expect them to reverse these practices, in fact, I expect more of these types of underwriting obstacles in the near future. They're less concerned with quantity of business, and more concerned with quality, especially since the rest of the environment is tightening up around them.

    You know how before a hurricane, people board up their windows and bring in any loose objects? The banks are doing the financial equivalent of that...

  • Lender on 2013-05-23 10:58:21 AM

    The key word is "lender partners". If you have such a dislike of your broker lenders perhaps this is not your calling. We are all on the same side of the broker channel as an option vs. banks. We are all governed differently and adopt to change at different paces. To assume that others will not follow may prove to be naïve. When other lenders indicate they are going to jump and then say " psych" does that really make them better or just taking the easy route to follow rather than lead.

  • Ron Price/DLC on 2013-05-23 11:15:26 AM

    Actually I have any rather big dislike for the banks which they help us with every day; i have no dislike for our non bank/mono line lender partners whom i value greatly.
    What I do have a good dislike for on this site is the ability to comment 'anonymously'. If you have something to say, then say it proudly with identity.

  • Robert Stanfield, INVIS on 2013-05-23 12:59:55 PM

    I agree with Ron Price. I do not read the posts as often as I used to because I was tired of anonymous posts stirring the pot and making negative comments.

  • Ron Price/DLC on 2013-05-23 1:33:20 PM

    Thank you, I hope MBNews is listening :)

  • Ryan Kirwan, HQ Mortgages Inc. on 2013-05-24 3:59:34 AM

    On the bright side of things, if all lenders do follow suit with the 3% payment on the Secured LOCs, it is another reason to keep people away from those collateral charge mortgages! As for the unsecured debt and the 3% payment, I can see that staying for the long haul - that's a good policy.

  • Lender on 2013-05-24 5:30:15 AM

    My comments are a reaction to negative commentary towards lenders who adopt to change in the interest of sustaining their long term support of the broker channel. There seems to be the same lenders used perpetually as targets of negative bashing. No one stops to question that perhaps they are making these decisions based on their long term objective to be a sustainable force to support our broker partners. Brokers are our bread and butter and we are all on the same side. Until all brokers recognize that we need to accept and adapt to change in the interest of the continuation of broker support we are never going to end the negative attitude. Corporations make decisions based on a matrix of reasoning particular to their institutional lending. To put us all in the same basket is not realistic. Lender comments remain anonymous because they are the expressed opinion of an individual working under the brand. We are not at liberty to post our names unless we own the company. So in an effort to add insight defend our companies we post without our names. It's just the appropriate thing to do. So I do not make claim to my opinion as being the opinion of the company I work for although I doubt they disagree. There is no us against them between lenders and brokers - it's simply us. We will only gain more of the pie once everyone figures this out.

  • A Broker on 2013-05-24 8:00:00 AM

    It has always been our jobs to ensure borrowers max out on credit so we can gain the largest compensation possible for our efforts. Maybe it is about time this business started acting like professionals and started to think about where the greed has and is taking us. I think the best thing is that hopefully we will lose all the dishonest and uneducated so called agents and brokers in the business due to the decline in business. Being in the business for over 30 years I can honestly say that if someone asks I can no longer recommend going to a mortgage broker. Time to clean up certain brokerage organizations and members and get back to a higher level of integrity. Also, stop complaining about every little thing. Not professional. Either work with it or leave the business.

  • Lender on 2013-05-24 8:06:29 AM

    Dear Broker - you get it. Thank you for your class and integrity.

  • Versico Financial Inc on 2013-05-24 10:49:53 AM

    The mortgage underwriting software has always had the 3% calculation for credit cards and in some cases higher amounts if there was no scheduled payment amount. What is more difficult to deal with is the unused secured line of credit. If the lenders want to qualify a borrower they can and will discount the amount or under the contract they can always add a covenant and prohibit the borrower from utilizing the line of credit.

  • Victor Tanti, AMP on 2013-05-27 8:53:15 AM

    It is First Nat and MCAP not Street

  • sam singal on 2013-12-30 11:28:21 AM

    It is ridiculous to allocate any amounts of "unused credit" to these calculations. Nothing stops anyone to increase their debt at any time after they get funded. I would like to see the historical data that suggests that approved available credit has greater impact on future debt vs potential available credit...

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