Geez, if I don’t post every single day, you guys are going to steal my ideas!
My mortgage broker emailed me on Friday morning with “BREAKING NEWS” about the upcoming changes to CMHC, but suddenly this “BREAKING NEWS” feels old. It’s sort of like how CNN always hits the air with “BREAKING NEWS,” except it’s not really breaking. Protesters in Washington for the 15th day in a row? Yeah, I mean, that’s interesting, but it doesn’t really deserve the bright-red banner running across the screen, or the ALL CAPS font.
Nevertheless, here I am, watching the readers fight the good fight in the comments section, wondering, “Are they going to talk about the changes to the mortgage market? If they do, then does my Wednesday blog post seem like classic Monday-morning quarterbacking?”
Well, it’s either go back to blogging every day, Monday-through-Friday, like I did from 2007 to 2011, or, just let the readers get the jump on me now and again.
The recent CMHC changes in the mortgage market was only the beginning of the story, and as some of the readers pointed out (Spoiler Alert!), there’s a Genworth and Canada Guaranty angle here, and of course, I’d be remiss if I didn’t talk about the (gasp!) rock-bottom, 5-year, fixed-rate mortgages that have been making headlines all week.
That can’t be right.
Must be a typo.
Too good to be true.
But before we get to that, which is depressing for those of us already in fixed-rate mortgages at substantially higher rates, and exciting for those active buyers in the market who will never, in my opinion, fully grasp the concept of just how low those rates are, I’d like to start from the beginning…
The CMHC provided us with a press release last Thursday, which most brokers didn’t see until Friday, and which wasn’t really talked about until Monday. Right. That was a mouthful.
Here’s the full press release:
CMHC Reviews Underwriting Criteria
The COVID-19 pandemic is affecting all sectors of Canada’s economy, including housing. Job losses, business closures and a drop in immigration are adversely impacting Canada’s housing markets, and CMHC foresees a 9% to 18% decrease in house prices over the next 12 months. In order to protect future home buyers and reduce risk, CMHC is changing its underwriting policies for insured mortgages.
Effective July 1, the following changes will apply for new applications for homeowner transactional and portfolio mortgage insurance:
- Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to our standard requirements of 35/42;
- Establish minimum credit score of 680 for at least one borrower; and
- Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes.
To further manage the risk to our insurance business, and ultimately taxpayers, during this uncertain time, we have also suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing. Consultations have begun on the repositioning of our multi-unit mortgage insurance products.
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said Evan Siddall, CMHC’s President and CEO. “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
These decisions are within CMHC’s authorities under the National Housing Act and are in anticipation of potential house price adjustment. We will continue to monitor market conditions and work with our federal colleagues on potential macro-prudential policy options.
CMHC supports the housing market and financial system stability by providing support for Canadians in housing need, and by offering housing research and advice to all levels of Canadian government, consumers and the housing industry.
Link HERE for those interested.
We already heard about the CMHC’s forecasted 9-18% decline in housing prices across Canada, but it seemed in this press release that they were repeated themselves, only this time, they tied together their change underwriting policies to their predicted decline.
CMHC is reacting to their own prediction.
Those who abhor the role of the CMHC in Canada, insuring mortgages at the taxpayer’s expense, will applaud this round of underwriting policy changes, so this probably comes as welcome news to many of you!
Then for others, they’ll recognize that these changes, once again, are aimed at the buyers who are reaching for the lowest run on the real estate ladder.
Currently, debt service ratios are 39% (GDS) and 44% (TDS), and they’re being tightened to 35% and 42%, meaning your income doesn’t stretch as much.
Currently, the minimum beacon score permitted is 600, and this is jumping to 680.
Currently, borrowers can use debt for their down payment, but this “loophole,” so to speak, is being tightened.
All three of these changes can be seen as either:
1) Very smart, almost obvious. Could have, should have been done sooner.
2) Completely unnecessary, almost arbitrary.
I make a living of arguing both sides, so I’ll leave this for now.
Keep in mind that these changes only affect insured mortgages, thus high-ratio borrowers. If you have a down payment in excess of 20%, you need not worry about any of this. Then again, if you have a Beacon score of 600, why the hell are you looking to buy real estate? There are always exceptions, but for the most part, that’s a really, really bad score, indicating a person with financial issues, past or present.
On Friday, I emailed my mortgage broker the following:
Will Genworth and Canada Guaranty follow suit? Any chance this opens up an opportunity for them?
Tony said that we’d get more information this week, but if history was any indication, there’s a chance that Canada Guaranty and Genworth would fall in line.
Most of their policies and lending criteria are identical to CMHC, and when CMHC implements changes to their underwriting standards, they almost always make changes accordingly.
That’s why it was so shocking to read the news on Tuesday, as some of the readers pointed out:
“Genworth Sees No Change As Canadian Regulator Tightens Insurance Terms”
From the article:
Genworth MI Canada Inc, which runs the largest Canadian private residential mortgage insurer, said on Monday it has no plans to change its underwriting policy for debt service ratio limits, minimum credit score and downpayment requirements.
Government-backed Canada Mortgage and Housing Corp (CMHC) said last week it would tighten rules for offering mortgage insurance from July 1, after forecasting declines of between 9% and 18% in home prices over the next 12 months.
The move would make it harder for riskier borrowers, who offer downpayments of less than 20%, to access CMHC’s default mortgage insurance.
Genworth Canada Chief Executive Officer Stuart Levings said the company, which provides mortgage default insurance to Canadian residential mortgage lenders, was able to manage its mortgage insurance exposure, including to borrowers with lower credit scores or higher debt service ratios.
Who saw that coming?
I’ll be honest, I don’t know exactly how many major underwriting policies differ between these three mortgage insurers, but I would be willing to bet it’s only a handful, at best.
For the most part, CMHC has been the brand-name, government-backed, go-to, and first choice among borrowers, with Genworth and Canada Guaranty being the never-heard-of mortgage insurers that brokers bring their clients to when there’s a problem with the loan.
Now, it’s quite possible that a high(er)-risk borrower goes to Genworth and/or Canada Guaranty first, and works backwards to see if CMHC will insure their mortgage.
In a market absolutely dominated by CMHC (I was recently told by a colleague that CMHC has a 70% market share), it’s possible that we see the dynamic shift dramatically as we move forward.
Competition is never a bad thing, although the market pessimists will suggest that this is not a step in the right direction.
The third piece of big mortgage news that came out this week was brought to us by our friends at HSBC, who long to be part of “The Big Five…”
“Five-Year Fixed-Rate Mortgage Falls To 1.99% In Canada For First Time”
June 8th, 2020
Pretty self-explanatory from the headline, but an excerpt from the article nonetheless:
A mortgage lender for the first time is offering Canadians a five-year fixed rate below 2 per cent.
HSBC has dropped its five-year fixed mortgage rate to 1.99 per cent, the lowest ever, though the rate is for default-insured mortgages only, according to mortgage comparison site RateSpy.com. The uninsured five-year fixed rate is roughly 2.29 per cent.
In the first quarter, 96.6 per cent of default-insurers borrowers chose a fixed rate, said the Canada Mortgage and Housing Corp.
We’ve all got those stories involving mortgage rate benchmarks, right?
I told my father in 2006 that I was buying a condo, and that I was taking a 5-year, fixed-rate mortgage of 4.99%.
He told me, “Rates will never be this low again. Take the 10-year for 6.79%.”
He explained to me just how low 4.99% was, historically, and how crazy it was to even think about 4.99%.
Rates went up as high as 5.99% for a 5-year fixed within the next eighteen months or so, and then they came down.
And down, and down, and down.
And while rates have increased here or there over the last fourteen years, they’ve never been over 5% again. Not even closes.
I remember the first time I heard of a 3.99%, 5-year, fixed-rate mortgage. That was a wild number.
Then the first 2.99% mortgage. HERE‘s an article from 2012. Back then, it was a stripped-down package with no benefits other than the rate, and brokers were advising borrowers to be weary.
Rates went up again, then down, then down some more, and eventually, all the ‘frills’ to the 5-year, fixed-rate mortgage returned (portability, pre-payment, etc.) along with the 2.99% rate.
Then in the past two years, we’ve seen rates go below 2.5%.
I was King of the Castle last summer when I hustled a 2.59% extension when prevailing rates were 2.89%. “Great job, babe,” said my wife, with little actual interest.
Did you ever think you would see this day?
So what is the overall feeling here in the mortgage market? Bearish or bullish? Good place, or bad?
The taxpayer-backed mortgage insurer, who is forecasting a massive decline in prices, has tightened their lending criteria.
The private mortgage insurers are trying to open a new space for themselves, thereby allowing some borrowers to get back into the market, having been kicked out for a little more than two days.
And the banks are dropping their rates faster than baseball fans are dropping their support for Major League Baseball in the face of this insane and greedy dispute between players and owners.
I dunno, folks.
Feels like a bullish day in the mortgage space, no?