Monday, February 8, 2010

CMHC minimum changes

There has been a lot of talk about CMHC rule changes to prevent a bubble. The rules should be modified to prevent people from getting in over their heads, regardless of where prices are. It appears that 30 year/10% down is not in the cards, but that does not mean that there aren't some other ways of preventing foreclosures.

1. Ensure the minimum downpayment is from personal savings, not another loan.
2. Raise the credit score required for higher amortization mortgages.
3. Ensure those qualifying on historically low variable rates are able to handle higher payments. I suggested 6% here. For those that don't qualify for 6% then at least limit the term to a 5-year fixed. The choice to go variable should not be done for affordability.
4. Verify incomes with tax statements if self employed individuals want CMHC insurance for high ratio mortgages.

I think the entire discussion being framed around preventing a bubble was a mistake. The goal of the changed rules should not be to cool down the housing market, but to prevent future foreclosures.

1 comment:

Carioca Canuck said...

Back when I was a banker in the 80's the mortgage approval process went something like needed a minimum of 15% down for a CMHC mortgage and 25 years was the maximum amortization.......

1-Your down payment must be from your own funds. No funds from a gifts from your parents, inheritances, loans, credit cards or lines of credit, etc, were allowed, and unless you were already a homeowner with equity, we asked to see your bank statements for 12 months to see the pattern of savings going in and also, to see where your money went. We also wanted to see a copy of the cheque for the initial downpayment and we verified that it was a real payment.

2-FICO credit scores didn't exist then.......but any credit worse than R-2 on the bureau and you were suspect. R-9's, a BK or OPD immediately failed you.

3-You always had to qualify at the posted rates if you had a mortgage with an interest rate that was bought down by the builder or vendor. Rates back then were 18-22%.......and buydowns were commmon.

4-3 years of T-4's for people with jobs, and/or tax returns as well as audited financial statements for the self employed or no deal.

5-Debt service ratios were 30% for mortgages (PIT + 100% of condo fees if applicable)and 40% for all debt, including estimated utilities, and the potential debt exposure due to unused C/C lines for example.

We are in a serious real estate bubble in Canada, and have been for 3 years now. Inflated asset prices always return to the historical mean eventually, provided that governments do not interfere in the markets for political reasons, such as we have been seeing them do for the last 3 years.........

The government deliberately created this disaster, thru utter and total ineptitude and interference the marketplace, hence now there is really nothing left that they can do to mitigate it's eventual demise and that of a generation of taxpayers. The forces that will bring about it's end are out of their control (the price collapse of certain countries international sovereign debt market instruments, whether it be currency or bonds, and the deliberate banking fraud that has occured at the highest levels).