This is a guest post from Ross Taylor
Today, February 2, will bring even more changes to the Canadian mortgage industry, as one by one, lenders will have no choice but to announce major changes to their lending guidelines.
Why is this happening? In recent months, some financial institutions have been quietly offloading the risk of even their low loan to value mortgages (previously uninsured) by securitizing these mortgages and bulk buying CMHC insurance – thus quickly pushing the amount insured quite close to the threshold of $600 billion set by the federal government. Only three years ago, the cap was $450 billion.
Yesterday, FirstLine Mortgages announced they were no longer offering mortgages for self- employed folks and for investors who have a rental property. Once the darling of the mortgage broker community, this company (interestingly, CIBC’s wholesale mortgage arm) has fallen off many agents’ radar over the past few months as their product line became increasingly uncompetitive.
Today, February 2, Street Capital Financial Corporation, currently the most sought after lender in the mortgage broker community, has also announced major lending guideline changes. Effective immediately, for their conventional product offerings (20% or more down payment) they will not accept rentals, stated income applications or equity based deals. Actually CMHC insures all their mortgages, not just the high ratio ones.
Other lenders will follow suit very quickly, you can be sure.
This is not about the Canadian Government losing faith in self-employed individuals, nor is it about the feds trying to punish people who invest in rental properties. Rather it maybe about lenders trying to decide which socio economic group can take the hit of increasingly tougher lending guidelines, and have the least impact on the lenders’ image.
But according to Industry Canada, some 15.6% of all working Canadians were self-employed as at March 31, 2011, one third of them female. It’s not clear what percentage of all residential homes are rentals, but anyway, lenders have probably decided the public will perceive rental unit owners as wealthy, and again, the majority will be indifferent towards their plight.
But if you take out a significant segment of the population from buying homes, is it not natural that would impact demand? Self-employment is not an automatic high risk, just as a person on payroll is not automatically low risk.
In recent months, the media has done an admirable job of painting a picture of pending doom and gloom for the Canadian real estate market. No one wants to follow our American friends into the abyss of financial chaos, as began in 2008 to 2009, when lax underwriting standards (amongst other things) led to an overly heated national housing market, and the result today, according to Zillow , is 28.6% of all American single family homes with mortgages have negative equity.
The risk today is the whole thing becomes a self-fulfilling prophecy, fuelled by the media, and orchestrated by our chartered banks.
Our banks quite rightly trumpet their financial strength and integrity to the rest of the world – and such moves will be perceived as sane and prudent. Perhaps it is not a coincidence that a byproduct of this move will be to hurt and perhaps squeeze out some of their major competitors for mortgage product offerings who rely heavily on CMHC and other mortgage insurers to ensure their portfolio.
This could just be a much more subtle way of the major banks trying to assert dominance and control of residential mortgage lending in Canada. BMO’s 2.99% five year fixed mortgage rate in January may just have been their opening salvo.
Over the years, Ross Taylor has been a stockbroker, fee based financial planner, income tax specialist, mutual funds company executive, retail banking VP, tech company executive, and has raised capital for small to mid-size businesses. These days he is a licensed mortgage broker agent and registered credit counselor, and still provides advice on most personal finance matters. He writes a blog at www.askross.ca
First salvo? Perhaps. It may also be the begining of a dubious slippery slope.
There’s a difference between self-employed and stated income if you don’t need to borrow the maximum possible. I got a mortgage using only my declared taxable income (with Firstline) and I was told I could get a lot more but wasn’t interested in knowing how much. Of course this probably doesn’t apply in Toronto and Vancouver.
The strange thing about this move is that it could increase rates for mortgages with high equity while those with small down payments may continue to benefit from insurance. I would rather see rates increasing significantly with risk (instead of having people pushed out of the market) so those who are better prepared can benefit from a lower rate. But there are always alternative lenders ready to take on risky borrowers. With the yields they make they could possibly get more investors if that market grows.
As I understand it, if these stated-income earners can prove their income – not difficult at all – they will not be effected. If they have been lying about their income, then why should I the taxpayer be guaranteeing their mortgages through the CMHC with prices at all time highs.
You are correct that if you remove demand it will push prices down. But why is that a bad thing? Houses & condos are so overprices.. It’s time to support sensibility.
See this video: The CMHC, the housng bubble and our “good banks” myth. A cartoon for cartoonish principles…
http://www.youtube.com/watch?v=Xk3j6g50Krs
This doesn’t sound like good news to me since I am self employed. I was considering buying my first home this month but decided to wait another year. I wonder if that means I’ll end up paying a higher mortgage rate now. I might be forced to get a real job temporarily in the meantime.
Michael, Street Capital appreciates the broker channel very well – right from the company’s inception – this was their only distribution channel, and they understand how to build and maintain healthy relationships with mortgage agents and their clients.
Their mortgage transactions typically do not require an appraisal – saving time and money. This is true even for conventional mortgages.
Mortgage brokers often favor lenders who do not cross sell other financial products to the client. Street Capital is one such “monoline” lender and they readily allow brokers to retain the client relationship, even at renewal time.
Street Capital’s day to day pricing is typically reasonable, often market leading or matching. They promote loyalty programs with their mortgage brokers, allowing them to avoid interest rate premiums on rental properties and self-employed applications, which are usually the case with other lenders. These loyalty programs can also lead to market leading interest rates available for their brokers’ clients in highly competitive situations.They have competitive commission programs; and prompt, reasonable, and intelligent underwriting. In addition, their mortgage prepayment terms are more reasonable than most multi-channel lenders, such as chartered banks.
Every broker tends to have a few lenders they favor, and often it is for reasons similar to those cited above. For “A’ deals, my sense is Street Capital is on a lot of short lists.
Yes, surely it’s not a good news for me too and people like me as what can I do if i am self employed. I am not able to even understand it that why they have done things like this. If the lending guideline would be classified on the basis of credit score then I think it would be understandable as credit score indicates your financial status but again if you are having your financial status good then you will rarely need to any organization to apply for mortgage loan.
I agree that mortgage brokers often favor lenders who do not cross sell other financial products to the client. And I think that these changes will be good for self-employed people. If there will be a chance to pay lower mortgage later, I think better to wait with buying a home, of course if you do not want to pay high mortgage rate.