Obtaining mortgage insurance for a home purchase is about to become more challenging on July 1, particularly for first-time buyers.
The Canada Mortgage and Housing Corporation (CMHC), Canada’s national mortgage insurance provider, unveiled stricter underwriting policies on Thursday for insured mortgages. The measures include:
- Limiting Gross Debt Service (GDS) ratios to 35% (from 39%)
- Limiting Total Debt Service (TDS) ratios to 42% (from 44%)
- Raising the minimum credit score to 680 (from 600) for at least one borrower
- Banning non-traditional sources of down payment that “increase indebtedness”
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said CMHC CEO Evan Siddall in a statement.
“These actions will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
What do the Changes Mean for Buyers?
CMHC’s changes will effectively reduce homebuyers’ purchasing power by up to 11%, according to RateSpy.com.
“Someone earning $60,000 with no other debt and 5% down could afford approximately 10.9% less home under CMHC’s new rules,” the site noted. “That’s like jacking up the minimum stress test rate from 4.94% (where it lies today) to 6.30%!”
Roughly 18% of CMHC’s high loan-to-value originations had a Gross Debt Ratio of more than 35%, according to a report from RBC Economics.
And about 5% of CMHC’s originations had credit scores of less than 680, according to data from Mortgage Professionals Canada.
CMHC Going It Alone?
One of the biggest questions since a leak of the new rules made the rounds on Thursday has been whether CMHC’s competitors, Canada Guaranty and Genworth Canada, would have to adopt the stricter underwriting measures as well.
According to the RBC Economics report, they won’t, at least not for now.
“Genworth Canada (MIC) and Canada Guaranty (CG) confirmed to us that they have not been told to adopt any or all of the same underwriting changes,” the report notes. “…although we would not be surprised if they were to eventually adopt some (e.g., down payment sources, credit score) or even all of the changes.”
For what it’s worth, that same report notes that it’s “interesting” that CMHC delivered the announcement, since mortgage insurance market changes have historically been announced by the Department of Finance.
Mortgage Industry Reaction
The announcement elicited wide-ranging opinions from throughout the mortgage industry. Here are some of them…
“I think the changes are well-intentioned, but poorly timed. I understand the rationale, but the people most at risk of default are already in their first home and insured. Disqualifying purchasers now won’t improve the quality of the portfolio already at risk,” Mortgage Professionals Canada CEO Paul Taylor told CMT.
“If house prices do soften, from a public policy perspective, that’s precisely the time to bolster support for first-time buyers. Making homes more difficult to finance will, once again, reserve properties for purchase by the already well-capitalized.”
Taylor added that the timing of the announcement, in the midst of a global pandemic, could further slow the market, on top of the 9-18% home price reductions forecast by CMHC.
“The Federal government is spending billions of dollars to support a struggling economy,” Taylor said. “These changes actively suppress activity.”
Ron Butler of Butler Mortgages Inc. also understands CMHC’s motive, acting essentially as an insurance company.
“They must be prudent in the face of an economic disaster,” he said. “It’s hard to argue against better credit scores when you’re insuring a $940K mortgage. (And) 680 is simply a proper credit score.”
And while first-time buyers may face the brunt of this policy change, Butler noted they can easily choose a lower-cost property, which may be easier in certain regions compared to others.
“Ultimately, I’ll take these changes over a 10% minimum down payment any day,” Butler said, referring to the policy change floated by Siddall several weeks ago.
Wrong Time to “Tinker” With Policy
While many understand where the policy adjustments are coming from, others are adamant that now is the worst time to implement such changes.
“I would argue against tinkering with mortgage underwriting criteria in light of the pandemic-driven housing market slowdown,” True North Mortgage Founder and CEO Dan Eisner told CMT. “Some of these changes may be needed, but the timing is questionable…it’s as silly as buying an umbrella after a flood. Now is the time to be encouraging economic activity.”
Asked which measure will be the most restrictive for first-time buyers, Eisner said first-time buyers will be most-impacted by the increased income requirements.
“Keep in mind, this change arrives not too long after the Department of Finance implemented the qualifying rate stress test, which already pushed many homebuyers out of the market.”
Responding to critics, CMHC CEO Evan Siddall wrote on Twitter: “We acknowledge the potential ‘pro-cyclical’ negative impacts on housing markets of CMHC’s decision to tighten underwriting. However, the benefits of preventing over-borrowing far exceed these costs. Not acting also exposes young families to the tragic prospect of foreclosure.”
Some, including Butler, foresee a brief increase in home-buying as people rush to purchase before the new rules take effect.
“There will be a minor spike in sales based on this change, and then comes the September Cliff,” Butler said, referring to an expected drop in activity once the widespread mortgage deferral programs come to an end this fall.