Tag Archives: CMHC

Starting today, self-employed Canadians have a better shot of qualifying for a mortgage

Photo: James Bombales

It’s long been an accepted fact that self-employed Canadians have difficulty qualifying for mortgages. But that could be able to change, now that new lending rules are in place.

Starting today, new guidelines from Canada Mortgage and Housing Corp. (CMHC) will make it easier for anyone who has been self-employed for less than two years to qualify for a mortgage. The new rules will ask lenders to consider additional factors in their decision-making process, such as predictable earnings, cash reserves and education.

“Self-employed Canadians represent a significant part of the Canadian workforce,” writes CMHC chief commercial officer Romy Bowers, in a statement. “These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates.”

Roughly 15 per cent of Canadians identify as self-employed, according to CMHC data, and the agency predicts that the number will increase as the “gig economy” continues to grow.

Approved lenders, including the country’s big banks, are under no strict obligation to observe the new guidelines, though it is likely that each will take their own approach to the new rules, according to CMHC spokesperson Audrey-Anne Coulombe.

“Implementation of CMHC guidelines may vary among lenders,” she tells Livabl. “These new guidelines are meant to be principle based and not to be too prescriptive to provide maximum flexibility for lenders.”
She adds that the overall objective of the rules was to provide additional guidance to self-employed Canadians looking to qualify for a mortgage.

“These policy changes will make it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates,” she shares.

Source: livabl.com –  

 

 

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Why a 20% home down payment may not be worth it

Source: The Globe and Mail – Rob Carrick

Rob Carrick

It’s tough to feel financially prudent when buying a house these days.

That’s why an increasing number of first-time buyers are saving a down payment of 20 per cent or more. In doing so, they avoid having to buy mortgage default insurance which, in the case of a house price of $487,095 (the national average) bought with a 10 per cent down payment, would be 3.1 per cent or $13,590. This premium is generally added to the mortgage, which means more interest to pay.

It certainly sounds financially prudent to make a 20-per-cent down payment where possible, but this isn’t always the case. In fact, you may save money both now and in the future by making a slightly smaller down payment and taking on the cost of mortgage default insurance.

Listen up if you’re concerned about the new mortgage lending rules that were announced last week and will take effect on Jan. 1. When making a down payment of 20 per cent or more, the new rules require that you be able to qualify for a mortgage at the greater of the five-year benchmark rate published by the Bank of Canada, or the original contractual rate plus two percentage points. An easier path to a mortgage may be to make a smaller down payment.

To even propose this seems bizarre. “The story has been that you’re just throwing money away with mortgage insurance,” said Mike Bricknell, a mortgage agent with CanWise Financial. What this thinking ignores is the way today’s mortgage market discriminates against people who make down payments of 20 per cent or more. They may pay a fair bit more for a mortgage than someone with a high-ratio mortgage (down payment of less than 20 per cent) both now and on renewal.

A lender dealing with a client who has a sub-20 per cent down payment can take comfort from the fact that the loan is covered by government-backed insurance that is paid for by the borrower. A conventional mortgage (20 per cent or more) can be insured as well, but by the lender. All in all, a high-ratio mortgage is preferable from the lender’s point of view and often results in a lower mortgage rate.

Mr. Bricknell has lately found that rates on five-year fixed rate mortgages are about 0.45 of a percentage point less for high ratio as opposed to conventional mortgages. Maybe your lender can do better than that. If not, consider this example of how a down payment less than 20 per cent can pay off.

We start with a $450,000 house and a buyer with a 20-per-cent down payment already saved. With a conventional mortgage amortized over 25 years, Mr. Bricknell figures this person could get a five-year fixed rate mortgage at 3.29 per cent. That means a monthly payment of $1,758.

Now, let’s see what happens when this borrower makes a 19-per-cent down payment. A smaller down payment means borrowing a bit more, and thus more interest over the life of the mortgage. Also, mortgage insurance will be required at a cost of $10,206. All of this nets out to a monthly payment of $1,743, with the mortgage insurance premium included. How is this possible? Mr. Bricknell said it’s because the high-ratio borrower gets a mortgage rate of 2.84 per cent.

There’s a stress test for high-ratio mortgages as well, but it’s marginally less onerous than it is for conventional mortgages because you only have to be able to handle the Bank of Canada benchmark rate, currently 4.89 per cent. Thus the high-ratio mortgage in Mr. Bricknell’s example would have a qualifying rate of 4.89 per cent and the conventional mortgage would be at 5.29 per cent (the client’s actual rate plus two percentage points).

The two mortgages outlined by Mr. Bricknell are pretty much a wash right now when compared on cost. Looking ahead, the high-ratio mortgage offers the potential for lower interest rates when it’s time to renew your mortgage. This assumes that lenders will continue to look more favourably at high-ratio mortgages.

Mortgage industry data show that even as house prices increased from the early 2000s through the past few years, the percentage of people making down payments of less than 20 per cent has declined to 39 per cent from 54 per cent. If the rationale for this is to save money and be financially prudent, a rethink is required. Depending on the rates offered by your lender, a slightly smaller down payment could save you money in the long run.

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CMHC explores cutting red tape for self employed borrowers

The national housing agency is exploring ways to make it easier for entrepreneurs and new immigrants to buy a home by cutting some of the red tape required to prove they can afford to pay the mortgage.

“Right now, under our mortgage insurance policies, you have to be able to document income to get mortgage insurance, to a level of specificity that discriminates against new Canadians, because they can’t do that,” Evan Siddall, the CEO of the Canada Mortgage and Housing Corp., said in a wide-ranging interview with The Canadian Press.

“It discriminates against entrepreneurs, as well, because they can’t prove their income as well, so we’re looking at our own policies to try and make sure that there is more equity in our mortgage insurance programs,” he said.

Anyone who wants to buy a home in Canada without a down payment of at least 20 per cent of the purchase price is usually required to get mortgage loan insurance from the CMHC, which requires a smaller down payment of five per cent on a home worth up to $500,000.

A 10-per-cent down payment is required for the portion of the price over $500,000, with $1 million being the maximum property value allowed.

The mortgage insurance comes with a premium, which the lender will then pass on to the person buying the home.

Borrowers need to satisfy lenders they will be able to make their mortgage payments, which usually means providing proof of employment and a few pay stubs. But that can be tricky for people who just started their own business.

It can also be a barrier to those whose employment history has gaps for other reasons, such as having recently immigrated to Canada.

People who are self-employed, for example, usually need to provide notices of assessment for the previous two years. Their income is determined by averaging those two years, although the most recent year can be used if it has increased annually for at least four years.

They also need to have been doing the same type of work for at least two years.

Dan Kelly, president of the Canadian Federation of Independent Business, said more flexibility would be welcome, especially for startups.

“If one starts a business or is self-employed, the lines between their personal and business finances are often quite blurry,” said Kelly.

“Often, their personal assets are required to get financing for the business. But then they also have a challenge getting financing on the personal side, because they don’t have the nice, clean letter of offer from an employer that is often quite convincing in these situations,” he said.

Any relaxation of the rules would naturally increase the risk. So Siddall said the agency is looking at how to manage that, including different ways to document income, and higher premiums.

“Can we charge for that risk? Better to charge that risk than not to make it available,” he said.

Jack Fiorillo, a broker with TMG The Mortgage Group in Woodbridge, Ont., said he expects the CMHC to be fairly conservative on this front.

“It will be a very small sandbox that CMHC will play in, probably at the beginning, and then maybe if once their risk appetite increases, maybe they can expand that box,” said Fiorillo.

He said he expects the potential change to make it easier for a relatively small number of self-employed people to get a mortgage, and they will likely have to pay higher interest rates.

The CMHC said it has been compiling data on how many would-be homeowners have their mortgage applications rejected for these reasons, but cannot disclose those numbers right now because it is based on conversations with commercial lenders.

“We are still doing research and development to move this forward,” CMHC spokesman Jonathan Rotondo said in an email.

Siddall said the Crown corporation has raised the idea with its board and expects to announce something within the next six months.

Source: The Canadian Press

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Commentary: CMHC hike a much-needed first step in moderating price growth

Commentary: CMHC hike a much-needed first step in moderating price growth

While real estate professionals have expressed worry that the CMHC’s mortgage insurance premium hike will make purchasing more difficult for hopeful home owners, a long-time industry analyst stated that the decision is an important first step towards ensuring better affordability.

Last week, the CMHC increased the premiums on the mortgage default insurance that home buyers have to service if they put in less than 20 per cent for down payment.

In a recent column for The Globe and Mail, markets observer Rob Carrick described the housing industry’s response to the move as an attempt to score brownie points with the first-time buyer demographic.

“Expect this increase to be added to the grievance list of people who work in the real estate-industrial complex – agents and mortgage brokers, plus others who make a living from home sales. They are working hard to portray first-time buyers as martyrs to government policies designed to cool down the housing market,” Carrick wrote.

Carrick argued that the government, and not the industry’s self-interest, is better situated to effectively deal with the long-running affordability crisis.

“The wrong approach is to offer cosmetic, politically expedient help to young buyers that fails to address the reality that it’s way more of a burden to own a house than it is to buy one.”

cmhctable

“[These] measures are not just necessary – they may also help to make houses more affordable by containing price increases or causing them to fall,” he added. “CMHC is increasing premiums to boost funds available in case there’s an economic shock of some sort and mortgage defaults soar. High house prices increase this risk because people must stretch their finances to get into the market and then afford the full array of costs as a homeowner.”

Carrick castigated provincial governments for engaging in misguided—and ultimately, harmful—policy responses.

“Ontario is offering a limited break on land-transfer tax, while the B.C. government is offering loans to first-time buyers to help them put together a down payment on homes costing up to $750,000,” Carrick explained.

“Measures like these incrementally support more home buying, which in turns pushes prices higher. Worse, we end up helping people get into the market while ignoring the much more important question of how they’ll be able to afford their mortgage over the long term.”

Source: MortgageBrokerNews.ca – by Ephraim Vecina | 23 Jan 2017
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Maple Bank Siezed by OSFI and Cut Off by CMHC

Maple Bank

Maple Bank, a niche securitization player in Canada’s mortgage market, looks like it’s going down.

Banking regulator OSFI has taken control of the bank’s Canadian operations according to the Financial Post, which quotes OSFI Superintendent Jeremy Rudin as saying, “We are guided by our mandate, which is to protect the depositors and creditors of the Canadian branch and have taken this step to safeguard their interests.”

On top of that, CMHC has terminated Maple as an approved issuer of mortgage-backed securities (MBS). CMHC made this statement:

Effective immediately, Canada Mortgage and Housing Corporation (CMHC) has suspended Maple Bank GmbH – Toronto Branch as an Approved Issuer of National Housing Act Mortgage-Backed Securities (NHA MBS). The suspension is the result of restrictions placed on the operations of Maple Bank GmbH by Germany’s Federal Financial Supervisory Authority (BaFin) that affect its ability to fulfill its obligations as an Approved Issuer.

CMHC provides a timely payment guarantee of interest and principal to NHA MBS investors. CMHC’s guarantee of NHA MBS issued by Maple Bank GmbH – Toronto Branch are not impacted by the suspension.

Here is a good summary from Handelsblatt about what triggered Maple’s woes → Link.

 

maple bank chart

Maple Bank is probably not coming back. National Bank has already written off its 25% stake. That’s disappointing for the mortgage market because, while Maple was a small player in the MBS market, it was still a player. And in a market where MBS spreads have widened significantly in the last year, the market needs all the liquidity it can get. (MBS spreads refer to the extra yield that mortgage investors demand on top of safe government bonds.)

According to sources, Maple bought mortgages from a handful of non-bank lenders. It also provided warehouse facilities (i.e., short-term capital to fund mortgages until they’re sold to investors). Lenders would take funded mortgages, package them up, sell them to Maple and then Maple (as a former CMHC-approved issuer) would issue MBS and/or sell those mortgage pools into the Canada Mortgage Bond (CMB) program. This provided cheaper funding for lenders than simply selling their mortgage commitments to big institutional buyers.

Based on CMHC data, Maple was ranked 21st out of 82 MBS issuers in terms of market share, with $3.49 billion of MBS outstanding out of $441 billion industry-wide.

“Losing any funder is never good,” said one lender executive who preferred not to be quoted. “All of their mortgages were originated in the broker space.” That leaves big securities firms like TD Securities, RBC Dominion Securities, National Bank Financial and Merrill Lynch as the main buyers of broker-originated mortgages. “If it’s just big players left, it’s not positive for consumers,” he added, noting that less competition raises funding costs for bank challengers.

Side story: On an unrelated positive note, we hear that Laurentian Bank is now going to be a player in the securitization space. That is very welcome news for broker lenders. More from Bloomberg.

None of this should cause investors in Canada’s MBS market to lose confidence. What sunk Maple Bank was unrelated to Canada’s housing or securitization markets. CMHC is now managing its MBS to ensure investors get paid as expected. The housing agency sent CMT this statement today:

Canada Mortgage and Housing Corporation’s (CMHC) guarantee of NHA MBS issued by Maple Bank GmbH – Toronto Branch is not impacted by the suspension, therefore there is no impact on MBS investors.  Furthermore, this suspension will have no impact on homeowners or mortgage holders.

CMHC has taken control of the NHA MBS and related mortgage cash flows and provides a timely payment guarantee of interest and principal to NHA MBS investors.

CMHC has previously had four issuer defaults in the early 1990s. No MBS payments to investors were ever missed and CMHC did not incur any losses on these previous issuer defaults.

We’re told by other sources that CMHC has never lost money by guaranteeing NHA MBS, even when issuers default. That’s thanks in part to the excess spread that’s earned between the mortgage interest (paid by borrowers) and the MBS interest (paid to investors). 

“The [MBS] trades themselves are fine; but with Maple now essentially closed for business…whoever was using them will have to find alternative funding…” said one capital markets pro we spoke with. Fortunately, all lenders who relied on Maple have backup funders, we’re told.

As for small Canadian depositors, the fallout is limited. Maple’s latest annual report notes: “The Toronto branch specializes in lending businesses, in particular the acquisition of mortgage loans for securitization, and deposit taking.” According to OSFI, however, Maple Bank is a foreign bank “authorized under the Bank Act to establish branches in Canada to carry on banking business in Canada.” Foreign banks cannot generally “accept deposits of less than $150,000” in Canada.

Maple’s last report noted that its “securitization business grew significantly” through 2014. And now it’s gone; just like that.

Source: Canadian Mortgage Trends  February 10, 2016  Robert McLister  

Maple Bank

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Condo sales with no cash down payment proposed by B.C. developer

Townline wants to sell condos in The Strand development in Port Moody, B.C., to buyers who don't have the cash for a down payment.

Buyers would get a discount, which would become a virtual down payment

A B.C. developer wants to sell condos in Metro Vancouver’s red-hot real estate market to first-time buyers without the cash for a down payment, but not everyone is sure it’s a good idea.

“It’s just a different spin on, ‘How do we provide an affordable home ownership option to buyers who otherwise can’t get into the market?'” says Townline vice-president of marketing Chris Colbeck.

The company is proposing that buyers on limited incomes be allowed to purchase a unit in its Port Moody development for eight per cent less than the appraised market value.

The appraisal would be done by an independent third party, allowing the eight per cent to be used as a virtual down payment for a mortgage.

That would mean the bank would be financing 100 per cent of the cost for the buyer, says Colbeck.

The idea has already been approved by B.C. Housing, says Colbeck, and Townline is hoping the Canada Mortgage and Housing Corporation (CMHC) will approve the program as well.

“It’s a partnership we’ve made with B.C. Housing that’s providing us the ability to do this affordability program that hasn’t been done before. They’re the ones that have structured this program,” he says.

Under review by CMHC

Townline’s proposal is still under review, said CMHC spokeswoman Karine LeBlanc.

Normally home buyers are required to put down a minimum of five per cent to qualify for Canada Mortgage and Housing Corporation insurance, and 10 per cent for homes costing more than $500,000. It is protection that banks and other lenders insist on when providing a mortgage worth more than 80 per cent of a home’s value.

In this case the CMHC may grant an exception under its flexibilities for affordable housing program, says LeBlanc, but she stops short of saying buyers could be able to buy a home without a down payment.

“Under this program, CMHC will accept a broader range of down payment sources — that means alternatives to cash from borrowers. This could include sweat equity, grants, borrowed down payments or rent-to-own payments. This is not the same thing as requiring no down payment,” says LeBlanc in a statement.

Raising the risk?

UBC Sauder School of Business associate professor Thomas Davidoff says the program may help the developer sell the units quickly while the buyers save some cash, but he still has concerns about who is carrying the risk if the property values fall.

“CMHC normally requires some sort of down payment from the buyer because they want to know if the property value falls, the buyer will still have some equity and not default on the loan,” says Davidoff.

“Otherwise CMHC has to pay the difference to the lender upon a default.… If there is a large price decline CMHC is in a first loss position.”

Davidoff notes buyers without down payments have not demonstrated the ability to save, something that left many banks in deep trouble during the U.S. housing crash of 2008.

“As the U.S. housing market did better and better in the early 2000s, we saw people believe it was impossible for prices to fall. And when you believe it is impossible for prices to fall, you get into creative debt financing products that look bad in retrospect.”

“Lenders don’t have an upside in price volatility. They only have a downside, and we are in a very volatile price environment, and I would think lenders and their insurers would want to keep that in mind.”

Fine print

Colbeck notes the proposal would not create a second mortgage, and the eight per cent discount recognized as a down payment would not need to be repaid, but there would be other restrictions on buyers.

“The program is registered on title by a restrictive covenant to ensure that it has to be for an end user, a principal resident. You must live in the home as your principal residence for a minimum of two years. And after that two years you’re free to sell your home with no restrictions at market value.”

“To qualify you have to be a qualified household income. A qualified purchaser is defined as somebody with a family income that must be $65,850 or more for a one-bedroom or a one-bedroom and den,  or $92,430 for a two-bedroom.”

Townline is eventually hoping to offer 84 condos for pre-sale this spring, if the program is approved.

“At the moment, we are simply doing an information session,” he says.

Source: CBC News Posted: Jan 12, 2016 9:33 AM PT

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