The federal government has issued a new set of rules that will have a major impact on the mortgage market, but the biggest shock will fall on the consumer. The two most significant changes are that:
- Regulators are proscribing the insuring of a major swath of mortgages, effective November 30
- The qualification rate now applies to all insured mortgages, even five-year fixed loans with high and low LTV ratios, which is a difference
For many lenders, these changes mean potential trouble for the industry. One major non-bank lender speculates that as much as 40 percent of the insured mortgage volume could go away almost overnight because of these changes. This could jeopardize mortgage competition throughout Canada.
Why is this? Non-bank lenders need default insurance because it helps them gain access to the market through programs that the government has sponsored. Banks do not have to find investors to buy their loans, so they don’t need insurance as much.
Did the Canadian government talk to the major players to see what their thoughts would be? No – this hit the market as a major surprise.
What can we expect to happen next?
- Lenders that do not take deposits may have to sell a lot of their loans to banks at a premium, and the increased costs of lending will go through to the borrowers. Mortgages over $1 million, amortizations longer than 25 years, refinances and mortgages for non-owner-occupied properties all can no longer find insurance, and so these loans are likely to have to be sold.
- Housing prices will dip significantly, as many first-time buyers will now fail to qualify for their desired mortgage amounts. The new rule makes insured borrowers prove their ability to afford payments at posted rates, taking as many as a fifth of buyers out of the market. The mortgage limits of over half of all borrowers could see an effect in the five-year fixed rate.
- Brokers will lose a significant share of the market. The banks will pick up jumbo mortgage, refi and rental business from the other lenders by the bushel. In fact, one of the Big Six banks is likely to leave the broker channel by the fall of 2017.
- MBS yields will slide along with supply, and pool risk will improve.
- Because all of this will impact Canada’s GDP in a negative way, expect forecasts of a cut in the Bank of Canada rate. Why? Oil is already plummeting, and housing (the other anchor of Canadian growth) will start moving down too.
- Before October 17, expect refinance applications to go through the roof – that’s when the new rules kick in.
- Market share for Alt-A lenders will go up again, particularly for refinances – and that means interest rates will go up for these as well, as consumers have fewer choices.
- In places like Toronto and Vancouver, where values are high, mortgages will become less available – and rates will go up with demand. The insurance rules will force this drop in liquidity, as will the increased capital requirements for insurers.
- Banks will have to qualify all conventional borrowers at the posted rates for all terms.
- Non-balance sheet lenders could charge higher interest for amortizations longer than 25 years since those mortgages can no longer be insured. Mortgages with longer than 25 year of amortization totaled over 50% of the portfolio insurance policies that CMHC wrote in the first half of 2016.
These changes will add more stability to the housing market, but there will be a significant impact on the economy – what that impact will be remains in question. However, as prices drop initially, there will be some pushback.
Here’s the deal, though – most of Canada is making a sacrifice for the ways in which Vancouver and Toronto have pushed the market up so quickly. While the rule preventing non-residents from taking the capital gains exemption appears to have Toronto and Vancouver in its cross-hairs, the other rules that are set to take place nationally seem to be a heavy-handed solution.
The Canadian government has instituted many regulations since 2008. The Department of Finance has also stated its intention to take a look at lender risk sharing. If lenders have to pay deductibles on default insurance claims, non-bank lenders with less capital could go down the tubes.
The latest rules come quickly and influence a whole nation of borrowers and lenders. Does the government have it in for non-bank lenders? It’s a question worth asking.
Another implication for this change is an increase in private lending. Borrowers that take a more common sense approach to applying for a mortgage – and have a solid exit strategy for moving from private lending to a bank loan at the end of the term – will be fine under these new rules. Business owners looking for financing may have to look at alternative business loan choices if the bank can help and if private lending doesn’t serve as an option for an equity take-out.