The Office of the Superintendent of Financial Institutions laid out new regulations governing underwriting practices yesterday, but voices within the mortgage industry question both the government’s motive and the intended effectiveness of its intervention.
According to the new rules, even homebuyers with 20% down payments, and who don’t need mortgage insurance, will be subjected to mortgage stress tests of 200 basis points in order to prove they won’t default on their mortgages. Additionally, there are restrictions on co-lending to curb any potential circumvention of the rules that stipulate how much can be lent.
Michael Lloyd, team leader for Dominion Lender Centres Canadian Mortgage Experts, believes the government’s real intention is to lower housing prices in Vancouver and Toronto, which he says would explain its repeated intervention in the housing market over the last year or so.
“It certainly seems that way,” said Lloyd. “They don’t have any room to raise rates, so it seems like the only other options they can do is make it tougher for people to qualify for mortgages.”
He also doesn’t buy the government’s reasoning that Canadian households are too indebted, thereby making the housing market precarious.
“Some of those household debt numbers they’re using are Canadians who have unused secured lines of credit and they’re using the limits and saying they owe that, but they don’t.”
Lloyd said the government has become so myopic that it’s going to stunt real estate markets in the rest of the country.
“The problem is most people making purchases in Vancouver and Toronto won’t be affected by the changes, but people in the rest of the country will,” continued Lloyd. “If somebody in small town Saskatchewan is trying to buy a house, they will now be further from that. It’s disappointing that they did this in spite of experts in the industry telling them not to.”
“It’s going to impact everyone. The market will be effected, which will cause less demand, which will slow prices or maybe even causes prices to come down a bit.”
The overall housing market could suffer aftershocks from the new underwriting regulations. For starters, borrowers could opt for shorter-term mortgages to benefit from the lower interest rates – and have an easier time passing the stress test – but that could also expose them to more rate hikes, which could compromise their renewals and cause them to default.
“I don’t think it will be as dramatic as some people think right now, but probably 10-20% of the mortgage market could be affected,” said Lloyd. It is a substantial number.
“We have the strongest housing market in the world, but we keep tinkering with it.”
Principal Broker of DLC
Service First Mortgages, Kevin Boucher, says the intervention is going to decimate monolines.
“To compete on a rate level so banks end up making up the money, that’s the real problem with all these rule changes,” said Boucher. “It’s going to decimate portfolio insurance, the monoline lenders, and make it three times more expensive to insure the same stuff it did six months ago.”
Boucher has also noticed a major drop in the number of first-time buyers he has as clients, 90% of whom usually have their parents present as guarantors.
“Thirty-five percent of my business used to be first-time homebuyers, but this year I’ve only done seven or eight applications for first-time buyers,” he said. “A certain segment of the market is gone. That’s my experience since the first round of tightening with the insurance rules, and now they’re doing it with conventional mortgages, which is wholly unnecessary. This is going to be a self-fulfilling prophecy that will stall the market, impact the economy, and people are going to get hurt.”