New CMHC mortgage rule changes impact non-wealthy borrowers

CMHC has announced new mortgage rule changes that will come into effect on July 1.  Here are the changes:

1. They are discontinuing the “Flex-down” mortgage product. This program is not being used very often, but it now disqualifies you from using borrowed money (aka line of credit) to use as a down-payment to purchase a home.
2. The minimum beacon score required to qualify for a mortgage with less than 20% down will increase from 600 to 680.
3. The debt servicing ratios for borrowers to qualify for a mortgage will be changed.  The gross debt service ratio (GDS) will decrease from 39% to 35%, and the total debt service ratio (TDS) will decrease from 44% to 42%.

It is the last two changes that will potentially have a HUGE impact on the real estate market, particularly in the lower mainland.  I estimate that item 2 will reduce mortgage qualification amounts between 9% and 13%, and this will affect buyers of properties worth less than $1 million.

Buyers of properties worth more than $1 million will be unaffected (at least directly) by this, as you need 20% down-payment to buy a property worth over $1 million. Still, there is a potential trickle-down effect, as buyers of $1+ million properties will likely be selling their current homes to buy a more expensive home, and a decrease in their equity may impact their ability to do so.

So why did I say that it could “potentially” impact the market? Fortunately, CMHC has competitors.  These companies are called Genworth and Canada Guaranty.  In the coming days, we will find out more about what these other companies do, and that will determine how bad this news is to Canadians.

These are the scenarios:

• The other mortgage insurers have followed CMHC on policy decisions in the past.  If they do so on this occasion (or are mandated to by the government), then all the worst-case scenarios I mentioned above will probably happen.
• They could make changes but not entirely follow what CMHC has done.  I think one possibility in this scenario is increasing mortgage insurance premiums to “compensate” for the “additional risk” compared to CMHC.
• They could keep the current guidelines.  If this happens, then CMHC has effectively removed itself from the mortgage insurance business and hopefully, the other two insurers can handle the increased market share that they will receive.  If CMHC does not require them to follow, then it appears that they designed these changes to remove themselves from the mortgage insurance space.

My opinion

This below quote is supposed to be the mandate of CMHC:

“To facilitate access to housing and contribute to financial stability in order to help Canadians meet their housing needs.”

CMHC is Canada’s largest crown corporation, with $283 billion in assets.  I believe that most of that is due to mortgage insurance premiums.  The premium covers mortgage lenders in the event of delinquency resulting in a loss.  Mortgage insurance is required by law if you purchase a property with less than 20% down-payment.

The mortgage insurance premium on a $500,000 mortgage deal with 5% down is $20,000.  With all of these premiums paid, there must be a considerable delinquency risk, right?

https://www.cmhc-schl.gc.ca/en/housing-observer-online/2019-housing-observer/mortgage-market-continues-slow-amid-low-delinquencies

Per the above link, the delinquency rate in 2019 was somewhere in the range of 0.2%.  That means 2 in 1000 homes.  Of those, maybe some of them lost money, but unless there were a case of fraud, there would be very little in the way of “total loss” claims.  Yet since 2008, CMHC and the Canadian government have continuously worked to make it harder and harder for Canadians to buy homes, which is counter to their very mandate.  I would speculate that mortgage default insurance is a government legislated scam. It is a method of taxation on home buyers.  If it weren’t, then the risk premiums would be in-line with the risk involved, or they would relax the rules to allow the risk to be in-line with the premiums.

Then there is the matter of who it affects most.  If you have a 20% down-payment, mortgage insurance is not required.  Harsh insured mortgages policy changes hurt lower-income and poorer Canadians the most.  This is directly counter to the current governing party’s claims that they care about lower-income Canadians, marginalized Canadians, etc.  It is since the current government came into power in 2015 that the harshest regulations regarding mortgage qualifications have come into place, and most of those regulations have made it harder for low and middle-class Canadians to buy a home.  Then just before the election, they announce a “program” that was little more than political advertising for the Liberal government’s re-election campaign, as it was a program with absolutely no value.

Then there is the fact that they made this change middle of a pandemic when economic activity is already hurting!  They are not pouring water on the fire of a hot economy.  The changes will not affect delinquency rates, as the people who had a mortgage before the pandemic are going to be most of the mortgage delinquencies.  People who have lost their jobs during the epidemic are not going to be buying a home.

I would also postulate that equality of economic opportunity is an essential aspect of racial equality, of which we have seen an uprising over the past week or so.  It is not only how police officers treat racial minorities that dictate equality, but economic factors also.  CMHC did not make any changes to the mortgage insurance program for rental properties today, and it is known in the industry that rental properties are the riskiest residential type of mortgage lending.  

Being able to own your own home is a great equalizer of inequality.  It is most Canadians largest purchase, and many Canadians main asset and source of net worth. Now they are slamming the door on a large segment of the population.

I have tried to write my MP in 2015 and 2016 about these matters after the government made several changes after assuming power that decreased mortgage purchasing power by 20%. My MP was Jody Wilson-Reybould, the former justice minister.  I got back a form letter saying how much the government cared about Canadians, and they did nothing to change their intended policies.

When I started my career as a mortgage broker in 2007, I was able to do 100% financing with 40-year amortizations using the fixed rate that the borrower would receive, which would currently be around 2.4% and a 580 beacon score. Mortgage insurance premiums for those (from what I recall) were about 3.4% of the mortgage amount, which is lower than they are now.  Looking back at that, I would say that those policies were too lax, but even at that time and during the financial crisis, there were no major mortgage default issues affecting Canadian housing.

These mortgage rule changes are unlikely to stir the passions of the general population as we have seen over the past week, but I believe that they should.  I would be most happy if you share my message with your members of parliament and media and let them know that policies like these are unacceptable. The answer to an over-heated housing market is more housing, not suppressing Canadians purchasing power.