Fitch: brokers facing tighter underwriting on low-ratios

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Another credit rating company is weighing in  on Canada’s new rules for insured mortgages, suggesting brokers will soon see lenders move to duplicate those standards for uninsured home loans.

“In our view, when Canada Mortgage and Housing Corp. (CMHC) has instituted more restrictive underwriting guidelines for insured mortgages, lenders have generally followed suit for the uninsured product to the extent they weren't already adhering to more restrictive guidelines,” writes Fitch Ratings in its assessment of new mortgage rules announced last week in Ottawa.

The comments actually reinforce the fears of some brokers, worried that they’ll find it tougher to get even those conventional mortgages approved by both mono-lines and the banks.

Most brokers are already concerned the industry may suffer a significant cut to its high-ratio business, by as much as 5 – 6 per cent.

Any fall off in conventional mortgages resulting from more onerous underwriting standards would further reduce funded volume and not just for brokers focused on first-time homebuyers, say analysts.

While Fitch isn’t hazarding a guess as to where exactly lenders are likely to shore up their underwriting of conventional mortgages, OSFI has already indicated it will hold all federally-regulated institutions to a higher standard in terms of transparent and consistent oversight of lending decisions.

But ensnaring conventional mortgages with reforms to high-ratio lending may be a mistake, argue brokers, pointing to the lower risk associated with those loans. The New York-based ratings firm  agrees the threat those mortgages poses is reduced, but still supports any lender move to tighten underwriting.

“Uninsured mortgages typically have exhibited stronger arrears performance than their insured counterparts due to their lower LTVs, higher credit scores, and lower debt-to-income ratios,” according to Fitch. “Guideline revisions that encourage more prudent underwriting would be supportive of the observed performance.”
 

  • Paul Therien, CENTUM on 2012-06-29 3:45:35 AM

    This really should not come as a surprise knowing that most lenders bulk insure much, or all, of their conventional portfolio. It stands to reason that they would have to tighten up the lending to meet the insurers guidelines if they tighten up. Insurance is insurance, conventional or high ratio – either way the insurer is the one taking the risk, not the lender. If they do not tighten the requirements, the insurer will not insure the product, and the lender will not be able to securitize the debt.

  • Hal on 2012-06-29 7:39:14 AM

    At present, the new rules only apply to high ratio deals. Any deal with a LTV of 80% or less can still be approved at a GDS of 44, and with a 30 year amortization. Those files can still be bulk insured through CMHC.

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