This is what runs through my mind when I think of what’s happened since October 3, 2016:
The federal and provincial governments decided to collect the current mortgage policies and without consultation of all the major players in the industry, bunch them together and crumple them up into a ball. They then lite a few sticks of dynamite, stuffed them into the middle and ran. Explosions occurred on repeat leaving pieces of scattered policies, a cloud of First-Time Homebuyer HOME partnership confusion and a thick layer of ash of mortgage programs and competition that has completely vanished. Lenders, brokers and Realtors left to waft the fumes and pick up what remains to try to make some order of it. All while consumers foot the bill for the clean up.
The mortgage world has seen many changes since October 2016. These have not been little changes. Each announcement would have been significant on their own, let alone the fact that these have compounded from one to the next…to the next.
Every time I felt comfortable and ready to share my take, a new announcement would be released, altering the game again and delaying my post.
It will likely take months to years to acknowledge the full impacts these changes will have on the overall real estate market, but there is one clear and definite conclusion when it comes to financing - these compounded changes are going to cost mortgage consumers thousands of dollars on their borrowing. Thousands!
The flow of funds from investor to lender/insurer to consumer has altered, unfortunately leaving the consumer bearing the burden of limited borrowing capacity, less competition, and increased costs to borrowed funds both in interest costs and mortgage insurance premiums.
With these announcements, the responses by lenders has all been mainly reactionary. Most, if not all lenders were caught off guard and completely unware of the changes coming, one after another…after another. In some cases, there was the immediate response with the elimination of mortgage products and programs and steep increases in rates, while other announcements required lenders to take their time to be better equipped before they could advise on their position.
As a broker, understanding the lenders and insurers adaptions is key to knowing how the consumer was going to be affected with respect to borrowing. Lenders had to review and manage internal processes including, but not limited to: where their funds were coming from, costs associate to those funds, and how their systems and services could function to meet the new changes.
These rules are significant, with significant impact to the mortgage industry and consumer’s financing options. Let's take a look into the new rules...
September 23, 2016
OSFI announces draft advisory updating capital requirements for residential mortgage insurance risk. Implementation set for January 1, 2017.
[expand title="Coles Notes"]
- A new standard approach for residential mortgage insurance that is more risk sensitive, and incorporates new key drivers of risk and loss including creditworthiness, remaining amortization, and outstanding loan balance.
- “When house prices are high relative to borrower incomes, the new framework will require that more capital be set aside,” said Superintendent Jeremy Rudin. “Ultimately this will continue to provide a level of protection to both policyholders and unsecured creditors.”
Who is OSFI?From their website, The Office of the Superintendent of Financial Institutions (OSFI) is an independent federal government agency that regulates and supervises more than 400 federally regulated financial institutions and 1,200 pension plans to determine whether they are in sound financial condition and meeting their requirements.
What does this mean? OSFI is reviewing the capital requirements insurers must have available in relation to the risk level of the files they are approving. The higher risk files require the insurer to hold more capital reserves as a protective measure. This will likely translate into higher premiums for borrowers, higher interest rates and more rigorous underwriting, especially for borrowers with lower credit, higher loan-to-value mortgages, or longer term amortization. This may also lead to tougher approvals and more declines as insurers try harder not to incur losses on mortgages with higher capital costs. [/expand]
October 3, 2017
Minister Morneau Announces Preventative Measures for a Healthy, Competitive and Stable Housing Market.
- Applying a Mortgage Rate Stress Test to All Insured Mortgages - Effective October 17, 2016
- Changes to Low-Ratio Mortgage Insurance Eligibility Requirements - Effective November 30, 2016
- Forthcoming Consultation on Lender Risk Sharing
- Proposed Income Tax Measures
[expand title="Coles Notes"]
Applying a Mortgage Rate Stress Test to All Insured Mortgages Effective October 17, 2016, all high-ratio insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada's conventional five-year fixed posted rate. This requirement is already in place for high-ratio insured mortgages with variable interest rates or fixed interest rates with terms less than five years.
What does this mean: A borrower with less than 20% for their down payment will now have to qualify at the higher of the contract rate (the rate you are borrowing the funds at) or the benchmark rate (the mode of the big 6 banks posted 5-year rates), currently 4.64%. This for all mortgage products (fixed or variable) and terms (6 month to 10 years). Contract rates are roughly 2% lower than the benchmark rate. This effectively has lowered a borrower’s buying power by approximately 20% (e.g. a previous $400,000 mortgage approval would now be closer $320,000).
This requirement of the stress test will also be extended to low-ratio insured mortgages effective November 30, 2016.
What does this mean? On a low-ratio mortgage (putting 20% or more down), a borrower usually does not pay mortgage insurance premiums, however, in the mortgage market there are many lenders who rely on insuring all their loans to remain competitive in the industry. To do so, the lender would back-end insure (pay the insurance premium instead of the client) through bulk insurance option.
This new rule effective November 30th has required that all insured mortgage, including back-end insured mortgages, follow the same insurers requirements of qualifying at the higher contract or benchmark rate. Further to that, low-ratio mortgages now also have to meet the eligibility requirements noted below:
Changes to Low-Ratio Mortgage Insurance Eligibility Requirements New criteria for low-ratio mortgages to be insured will include the following requirements:
A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
- A maximum amortization length of 25 years;
- A property value below $1,000,000;
- For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the established amortization schedule;
- A minimum credit score of 600;
- A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
- If the property is a single unit, it will be owner-occupied.
What does this mean? If you are have a low-ratio mortgage that will be insured by a lender, your max amortization is capped at 25-years vs the previous allowable 30-years, your property cannot be over $1 million, your credit score cannot be below 600, your income needs to service the mortgage debt and housing costs (aka GDS) to a maximum of 39%, your income also needs to service your mortgage debt, housing costs plus all your additional consumer debt (aka TDS) up to a maximum of 44% - qualifying at the higher of contract or benchmark rate, and finally it must be a owner-occupied unit only.
No rentals and no refinances can no longer be insured.
Forthcoming Consultation on Lender Risk Sharing
Canada’s system of 100 per cent government-backed mortgage default insurance is unique compared to approaches in other countries. A lender risk sharing policy would aim to rebalance risk in the housing finance system so that lenders retain a meaningful, but manageable, level of exposure to mortgage default risk.
What does this mean? The Government wants to reduce the risk for tax payers. They are conducting meetings to determine how lenders can bear some of the risk with respect to defaults. This would most likely result in additional costs to lenders, which again, would be passed on to the consumer.
As an FYI, during the second quarter of 2016, CMHC generated $338 million in net income from the loan insurance and securitization guarantee programs. New securities guaranteed for the second quarter totalled $27.4 billion, comprised of $16.6 billion for market NHA MBS (Mortgage Backed Securities) and $10.8 billion for CMB (Canadian Mortgage Bond).
Proposed Income Tax Measures
To improve tax fairness and the integrity of the tax system, there were two measures to better ensure that the principal residence exemption is available only in appropriate cases, and in a manner consistent with the Canadian resident and one-property-per-family limits.
- An individual who was not resident in Canada in the year the individual acquired a residence will not—on a disposition of the property after October 2, 2016—be able to claim the exemption for that year
- Trusts will be eligible to designate a property as a principal residence for a tax year that begins after 2016 only if additional eligibility criteria are met.
There were also measures to improve compliance and administration of the tax system with respect to dispositions of real estate.
- The Canada Revenue Agency (CRA) will require a taxpayer to report the disposition of a property for which the principal residence exemption is claimed.
- A proposed measure would provide the CRA with authority to assess taxpayers, beyond the normal assessment limitation period for a tax year in respect of a disposition of real estate by the taxpayer
What does this mean? The government and the CRA are continuing to source ways to further improve information collection and record keeping on real estate transactions to ensure the exemptions are utilized correctly and shared with tax authorities. Bottom line, more reporting for you and your accountants at tax time should you sell your principal residence.
December 15, 2016
BC Government announced BC Home Owner Mortgage and Equity (HOME) Partnership program to partner with first-time homebuyers as they enter the housing market - Launched January 16, 2017
[expand title="Coles Notes"]
The B.C. Home Owner Mortgage and Equity Partnership program contributes to the amount first-time homebuyers have already saved for their down payment, providing up to $37,500, or up to 5% of the purchase price, with a 25-year loan that is interest-free and payment-free for the first five years. Through the B.C. HOME Partnership program, the Province is investing about $703 million over the next three years to help an estimated 42,000 B.C. households enter the market for the first time.
The program supports eligible first-time homebuyers who are approved for an insured high-ratio first mortgage. To qualify for the program, all individuals on title must:
- Have been a Canadian citizen or permanent resident for at least five years.
- Have resided in British Columbia for at least one year immediately preceeding the date of application.
- Be a first-time buyer who has not owned an interest in a residence anywhere in the world at any time.
- Use the property as their principal residence for the first five years.
- Purchase a home that has a purchase price of $750,000 or less (excluding taxes and fees).
- Obtain a high-ratio insured first mortgage on the property for at least 80% of the purchase price.
- Have a combined, gross household income of all individuals on title not exceeding $150,000.
- Have saved a down payment amount at least equal to the loan amount for which the buyer applied.
What does this mean? If you meet all the requirements above and are approved by BC Housing, then these are the things you will need to know for your mortgage approval:
- The funds from the BC Government are classified as borrowed funds and as such will have higher insurance premiums for loan-to-value purchases of 90.01%-95%.
- The loan from the BC Government is a second mortgage registered behind your first lender. A future refinance will require the payout of this loan.
- Even though the loans are interest-free for the first 5-years, lenders are requiring a “phantom payment” for this loan in the borrowers liabilities to hedge the risk. Lenders are requiring the loan amount amortized over 20-years at the benchmark rate, currently 4.64%.
Note: not all lenders have be able to get onboard with this program. Many key lenders have, but others require back-end system changes or investor backing to move forward and participate.
January 1, 2017
OSFI implements Capital Requirements for Federally Regulated Mortgage Insurers
[expand title="Coles Notes"]
Effective January 1, 2017, this Advisory will replace the Advisory: Interim Capital Requirements for Mortgage Insurance Companies.
The Advisory defines a new approach for the regulatory capital requirements for mortgage insurance risk that is more risk sensitive and incorporates key characteristics such as borrower creditworthiness, outstanding loan balance, loan-to-value ratio, and remaining amortization. It also ensures a level of conservatism in the protection provided to policyholders and other creditors of the mortgage insurers, and is adaptable to future changes.
What does this mean? OSFI has implemented the capital requirements insurers must have. Minor adjustments were made to the advisory announced on September 23, 2017.
Higher risk files require the insurer to hold more capital reserves as a protective measure. This has immediately translated into higher interest rates and higher mortgage insuarance premiums as noted below with CMHC’s announcement on January 17, 2017.
As we enter the spring market, we will see if more rigorous underwriting leads to more insurer declines as insurers try to lessen the losses on mortgages with higher capital costs.
January 17, 2017
CMHC announces Increases to Mortgage Insurance Premiums for consumers. The same week, bulk insurance increases were also immediately enforced for lenders.
[expand title="Coles Notes"]
CMHC is increasing its homeowner mortgage loan insurance premiums effective March 17, 2017. For the average CMHC-insured homebuyer, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment.
“We do not expect the higher premiums to have a significant impact on the ability of Canadians to buy a home,” said Steven Mennill, Senior Vice-President, Insurance. “Overall, the changes will preserve competition in the mortgage loan insurance industry and contribute to financial stability.”
Capital requirements are an important factor in determining mortgage insurance premiums. The changes reflect OSFI's new capital requirements that came into effect on January 1st of this year that require mortgage insurers to hold additional capital. Capital holdings create a buffer against potential losses, helping to ensure the long term stability of the financial system.
What does this mean? Borrowers with insured mortgages of 65.1%-95% loan-to-value (LTV) will be paying more for their mortgage insurance premiums as of March 17, 2017. The chart above shows the percentage increase for each tier of LTV.
Lenders also experienced bulk insurance increases, although not publicized, they have jumped close to three times the costs. These costs were implemented overnight and have resulted in less completion and higher costs for loans in the 65.01%-80% loan-to-value range, leading to higher and tiered interest rates for these LTVs.
Mortgage default insurance premiums are going up for the third time in as many years. The frustration from the consumer's stand point is that default rates have been at all-time lows and declining, see chart below. These increases are at a huge cost to consumers, of which the reasoning behind them does not seem to equate to increases presented, especially for low-ratio, lower-risk mortgages that have been hit with substantial increases.
In CMHC's 2016 Second Quarter results, they also note the following;
- Homebuyers with CMHC-insured mortgages have a strong ability to manage their debts as supported by an average credit score of 750 for transactional homeowner loans and an average gross debt service (GDS) ratio of 25.4% for the three-months ended June 30, 2016.
- The strength of CMHC’s portfolio is reflected in the overall arrears rate which, as at June 30, 2016, stood at 0.32%, down from 0.34% at March 31, 2016. Total number of loans in arrears was 8,386 as at June 30, 2016.
What do these changes mean collectively?
To show you in numbers, I have provided a case study so you can see what these changes mean to a consumer looking to get a high-ratio mortgage (less than 20% down). In this case, they are looking to put 5% down. I have used the standard 5-year fixed rate as a comparison. Prior to October 17th, a AAA standard 5-year rate was 2.39%. AAA rates have increased and are around 2.69% at the time of this blog.
Based on their income of $70,000, single auto debt of $250/month, a credit score of 711 and down payment funds of up to $25,000, the chart shows the borrowers max purchase price decreased from $459,000 (column A) before October 17, 2016 to $362,000 (column B) after October 17, 2016 – that’s a $97,000 loss in buying power.
Column C shows that same buyer using the BC HOME partnership loan. Here the borrower is using 2.5% ($8,925) for their portion of the down payment. The BC Government would match 2.5%, for a total down payment of 5%. The purchase price drops to $357,000 and mortgage insurance premiums increase by $677 to $13,057. Note, there is a "non-traditional" premium surcharge for purchases containing borrowed resources and clients with less than 10% for their down payment.
Column D considers the BC Government matching the borrowers 5% down payment, for a 10% total down payment. The borrower's purchase price increases to $367,000 with insurance premiums of $11,891.
Columns E, F and G, are the same as columns B, C and D, but are accounting for the higher mortgage insurance premiums being implemented on March 17, 2017. The borrower's buying power drops by approximately $2,000 across the board and the mortgage insurance premiums increase in the range of $1,250 to $2,120 depending on the situation.
Now if we look at the low-ratio borrower (a borrower with more than 20% for down payment) and how the changes impact them, those most affected will be in borrowers with 65.01%-80% loan-to-value (20%-34.99% down payment).
What was once simple and straight-froward for low-ratio mortgage rates, has since transformed into a complex matrix of insurable and uninsurable considerations with rentals and refinances left as mortgage product outliers not offered by all lenders. Loan-to-value (LTV), amortization, credit score, and whether one can qualify at the higher benchmark rate (4.64% currently), all come into play in determining a borrowers final interest rate.
Below is a sample of two lenders and how their rate sheets have adjusted through these changes. This does not cover all of their product offerings, but more of the common/standard products list. With Lender 1, you will notice that the Rate Sheet for February 16th (the more recent rate sheet) is a matrix for the 5-year products only, at the various loan-to-values (LTVs). The other terms are no longer considered in this complex visual, where they were in shown in the previous rate sheet from October 13, 2016.
Lender 2 is not as concerned with the LTVs on the file, however, greater than and less than 25-year amortizations and rental status are now distinctly separated for new pricing structures.
With over 40 lenders, and many lenders with a vast product breath, comprehending the new rules changes through rates sheets is a schooling all on it's own. Some lenders have even developed flow charts to guide brokers on their rates and products.
- Purchases and Transfer Only
- Qualified at the benchmark rate
- Up to 25 year amortization
- Property value less than $1 million
- Refinance, Purchase, Transfer, 1-4 unit rentals
- Qualified at contract rate for 5 year fixed term or greater
- Up to 30 year amortization
- Properties Greater than $1 million
- Equity take-outs beyond $200,000
What is the mortgage industry doing to support consumers?
There is no doubt that that the industry as a whole has felt like they have had the wind knocked out of them. Blind sighted in more ways than one. For me, the disappointment was that we as brokers, lenders and insurers were not invited to the table to discuss some of these vital and critical changes for consumers. These changes have not only put substantial limits to consumers, it has restricted the competitive market place for mortgage lending.
We need the market to be strong, consistent and resilient. We understand that sometimes that means rules need to be implemented to maintain and manage fluctuations that otherwise can't be harnessed in other capacities. However, the decisions made discounted the importance of all our lenders and what they bring to the table; providing competition and desirable mortgage products.
As an industry, our mortgage associations and brokerages across the nation, including my parent brokerage, VERICO, have been writing letters, meeting with MPs and making formal submissions to review some of the rules enforced, such as those that have eliminated competition in the market place.
- Pause the introduction of any additional measures that will affect the housing and mortgage marketplace. Provide at least 12 to 18 months for the most recent changes to be fully implemented and their impacts understood.
- Amend the portfolio insurance eligibility requirements to allow refinanced mortgages. If the previous 80% maximum loan to value guideline is unacceptable, consider setting it at 75%.
- Amend OSFI’s recent capital reserve requirements for mortgage insurers. The increased premiums do not, in our view, appropriately reflect the risk.
- Conduct a study into the potential effects of regional based pricing for insurance, and consider the effects of regionality as part of the risk sharing model. We believe that, over time, it will become very detrimental to Canadians in economically challenged areas.
- Put the risk sharing implementation on hold until more data is available regarding the impact of its introduction. It will add costs to lenders and insurers operations which will ultimately always be passed on to the consumer.
- Exempt all insured mortgages with fixed interest rate terms of 5 years or greater from the requirement to qualify borrowers at the Bank of Canada’s benchmark rate and permit qualification at the true contract rate associated with the term.
- Permit first time home buyers to amortize insured mortgages over 30 years, instead of 25 years.
- Modify the requirement of limiting amortizations on insured mortgages to 25 years, by enabling borrowers with a loan to value ratio of 80% or less to amortize up to 30 years.
- Exempt all insured mortgages with principal amounts of $499,000 or less from the requirement to qualify borrowers at the Bank of Canada’s benchmark rate, and permit qualification at the true contract rate associated with a fixed term of 5 years or more.
- The Bank of Canada benchmark rate should be the mode average of the 5 year posted rate of all federally regulated lenders, and not just the “Big 6”.
- Find ways to require and encourage all levels of government to remove red tape, excessive costs and delays in approving housing development. In its 2016 budget, the Federal Government has provided an unprecedented level of funding to municipalities for infrastructure improvements, housing and transit. Consider tying municipal funding grants and investment to a municipality only if it has a comprehensive red tape reduction strategy in place to efficiently deliver services to the public. Work with the Federation of Canadian Municipalities to make local government red tape reduction a priority. As a corollary, all levels of government need to look at the supply side of housing rather than just regulations to curb demand.
- Reduce high ratio insurance premiums so that they are revenue neutral.
- Recognize that housing becomes more affordable when consumers can better afford mortgage costs due to having less unsecured credit. Focus efforts to curb Canadians from overextending unsecured credit, such as credit card debt, by prohibiting collateral mortgages to be default insured. Collateral charges limit consumer options at time of term maturity and also permit, with ease, the transfer of lender unsecured debt to the collateral charge.
- Ensure that lenders of unsecured credit qualify borrowers on income and reasonable debt ratios, and not just based on credit scores and complimentary product matches to existing portfolios. (IE: Unsecured line of credit or credit card with mortgage.)[/expand]
- Further consultation with key stakeholders in the industry.
- Revision to the rules surrounding portfolio insurance to include refinances.
- Further study on the economic impact to the Canadian economy.[/expand]
Where do we go from here?
As it stands, now more than ever it's the time to rely on a professional mortgage broker who understands these changes and how they may impact your purchasing, refinancing, and renewal options. What one lender could do before, may not be the case no more. More research and time has to be dedicated to finding the prime solution. For low-ratio consumers, there will be more considerations to factor in when making a final mortgage decision. Having someone guide you through these options will be important to make the most of your mortgage and minimize your costs.
Consumers also need to know that there is still a great deal of change among the industry. As lenders look to find new solutions and product options to support consumers through these adjustments, they to will reinvent and build niche products where they may have lost others. It's become a new mortgage world. It's treacherous changes for the broker to navigate through, but it's our jobs to know the market, understand the lender nuances and to find the best mortgage product on the market for our clients.
If you have any questions or would like to know more, I'm available for your calls and emails.
Irene Strong Mortgage Professional 778-847-8466 firstname.lastname@example.org