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