As with most announcements from the Canadian Mortgage and Housing Corporation, the rollout of the organization’s new underwriting guidelines on June 4 has kicked off a storm of criticism, confusion and anxiety. Of the three changes to be implemented on July 1 (what a great Canada Day this one’s going to be), the most controversial is arguably the increase CMHC is making to the minimum credit score required for insured mortgages.
The increase in Beacon score from 600 to 680 has largely been met with consternation.
“The credit score is an imperfect measure,” says Dominion Lending Centres’ Dr. Sherry Cooper. “I know from personal experience that it has nothing to do with your income or wealth. If you have a lot of credit available to you on your cards, even if you don’t use it, it lowers your score.”
Jimmy Hansra of Centum FairTrust Financial Group is another industry veteran who thinks the new guideline, which fails to take into consideration the vast array of individual economic circumstances faced by Canadians, is flawed.
“It isn’t fair,” Hansra says of the CMHC’s reliance on one-size-fits-all policies. “And it doesn’t work.”
Matt Fabian, TransUnion’s director of financial services research and consulting, has a more forgiving view of the changes.
“I don’t think it’s a significant or controversial shift,” he says, “because if you look at the total population of mortgages that we track, only about eight percent are under 680. And a bunch of them, at the time they were originated, might have been above 680 and just dropped down.”
Fabian says a “very small proportion” of mortgages being originated to day involve borrowers with a sub-680 Beacon score, and the ones that make it over the line usually involve manual overrides, high down payments or other fiscal gymnastics on the part of brokers.
But, like most people interviewed about CMHC’s new guidelines, Fabian found their timing surprising.
“How does this help if there’s a significant downward trend in the origination market as a result of the crisis and lockdown anyway?” he wonders. “It’s also interesting that the other two large issuers [Canada Guaranty and Genworth] have decided not to adopt those rules.”
680 – The new magic number
Even though the new minimum credit score has been raised more than 13 percent, Fabian doesn’t see it impacting that many potential buyers.
“It’s a significant shift, but I don’t think it represents a massive chunk of the mortgage population,” he says, estimating that “five to 10 percent of total mortgage applicants” will be shut out of the market by the new standard.
“It’s going to disqualify a certain segment, but depending on an individual lender’s risk appetite, they may not want them in their portfolio from a mortgage perspective anyway,” he says.
It’s not only sloppy credit users who will be squeezed further to the margins. Canadians with short credit histories will be hit hard. That includes two vital populations of potential buyers – millennials and newly landed immigrants; the former makes up one of the largest population demographics in Canada, the latter is responsible for the country’s population growth, diversity and much of its economic might. Both groups will be at an acute disadvantage when they approach the market after July 1.
“Everybody has a story,” Hansra says, referring to CMHC’s assumption that a high Beacon score is the key factor in determining an individual’s credit worthiness. That’s simply not true for immigrants. Someone new to the country and attempting to establish herself – new credit cards, new apartment, new car – is inevitably going to be subject to a high number of credit inquiries.
“Your credit score’s going to go down because you have all of these credit inquiries, not necessarily because you have bad credit,” he says. “All of a sudden, your score can drop from 800 to 660. You’re not seeking credit, you’re just trying to establish yourself in a new country.” A policy change that impacts Canada’s immigrant community at a time when the world is debating the evils of institutional racism is a case study in bad optics.
“A lot of the big lenders have new-to-Canada programs,” Fabian says. “Some of the rules and products are adjusted to reflect that, so there are opportunities and options for this population.” TransUnion research suggests that new Canadians tend to perform as well or better than established Canadians. Many were experienced, responsible credit users abroad, but their credit score, if that’s all one sees, doesn’t tell that side of their story.
Fortunately, Fabian says consumers with Beacon scores of below 680 can bring them up relatively easily by making their payments and monitoring their credit for any forgotten, lingering debt that may be bogging them down.
“It’s not a huge leap for consumers to migrate forward,” he says. “In a given quarter, we see anywhere from 15 to 20 percent of consumers move up in risk tiers.”