Making it harder to borrow: Is CMHC on the right track?
Recently Canada Mortgage and Housing Corporation (“CMHC”), a federal crown corporation, announced that it would tighten rules for mortgage insurance starting on July 1, 2020 Tightening the rules
Mortgage insurance is essentially “default insurance” which is required in Canada for borrowers who cannot put down 20% or more for a down payment on a home. Insuring the mortgage makes the loan is essentially “risk-free” to a bank, so it can offer the borrower it’s lowest interest rate.
CMHC premiums range from a low of .60% of the total loan value (where the loan-to-value (“LTV”) is 65% or less) to 4.00% (where the LTV is up to 95%).
This amount is tacked onto the loan and repaid over time along with the mortgage balance.
As banks have their own underwriting rules, so does CMHC.
The changes that it is currently making are requiring the borrower to have a higher credit score (680 from the current 600), reducing the gross debt service ratio (from 39% to 35%) and total debt servicing ratio (from 44% to 42%).
This translates into the borrower being qualified to purchase a less expensive home of perhaps 10-12%. According to CIBC economist, Benjamin Tal, that might take 5% of potential homeowners out of the market.
As CMHC is predicting price drops of 9-18% Down, down, down, its move to make it harder to qualify for an insured loan are internally consistent, since an insured loan has less equity and thus, a court is less likely to grant a “redemption period” if the borrower is unable to make payments. CMHC is also predicting an increase in foreclosures of up to .8% (from pre-pandemic rates of .2%). However, even at .8%, that would mean that 99.2% of all mortgages would remain in good standing. The historical foreclosure rate in Canada over the last half century is about .25% (that is one quarter of one per cent), so as a general rule, Canadians almost invariably pay their mortgage payments -no matter what!
Non-government mortgage insurers in Canada such as Genworth MI and Canada Guaranty are not revising their underwriting criteria at this time Other choices, so that leaves at least two private alternatives to CMHC’s stricter mortgage insurance requirements.
Will CMHC’s predictions pan out? Will it’s tightening of underwriting prove to be the correct strategy?
A famous meta study by Philip Tetlock over a period of two decades and covering some 28,000 expert predictions about matters including economics, politics, climate, military strategy, financial markets, legal opinions, and other complex fields with uncertain outcomes suggested that such prognostications are wrong as often as they are right.) Bold, Confident & Wrong – Why you should ignore expert forcasts.
Voltaire said that “Doubt is not a pleasant condition, but certainty is absurd.”
We will re-visit these predictions next year to see if Mr. Tetlock’s findings still apply.
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