Monday, January 17, 2011

They're at it again!

Jim Flaherty, the Federal Finance Minister, cited several changes to CMHC insured mortgages in an announcement earlier today.

The changes are:
-the maximum amortization on CMHC insured mortgages will be 30 years, as opposed to 35 year amortizations
- the maximum loan-to-value on CMHC insured refinance transactions will be reduced to 85% from 90%
- CMHC will no longer insure home equity line of credit’s (HELOC’s)
Flaherty cited several reasons for imposing the new changes:
-the maximum allowable amortization was changed to significantly reduce the interest costs to homeowners (we all know that your interest costs are lowered significantly when you choose a shorter amortization)
-the refinance rules were changed to prevent homeowners from refinancing their homes irresponsibly and to promote savings through home ownership
-CMHC has pulled away from insuring HELOC’s as they found that some financial institutions were allowing borrowers to roll too many consumer purchases into CMHC insured mortgages.
Flaherty stated that the purpose of CMHC is not to finance consumer purchases. This new rules does NOT mean that an individual can no longer obtain a HELOC, it just means that they cannot get CMHC insurance on that loan. HELOC’s are currently available at 80% loan to values on purchases and refinances.

My two cents:
Hindsight is 20/20 and the government is clearly trying to make up for irresponsible decisions on their part during the boom between 2005-2007. I have to argue that 0% down, 40 year mortgages should NEVER have been available and that these irresponsible lending policies on behalf of CMHC contributed to the mess we are now in (record levels of consumer debt). I also have to wonder if the government is making the same mistake it did during the boom, not having the foresight to see where these new lending policies will take us.
Flaherty has called these new changes “moderate” and I tend to agree. However, combined with the other moderate changes in the last few years, I think they all add up to be major changes to the mortgage/real estate industry.

CMHC changes in the last 3 years:
-removal of 0% down mortgages, reduced to 95% loan to value mortgages
-removal of 40 year amortizations, reduced to 35 years
-revenue property loan to values reduced to 80% from the previous 95%
-Minimum beacon score requirements of 600 imposed
-HELOC mortgage loan-to-values decreased from 95% to 80%
-Refinance loan-to-values reduced from 95% to 90%

Yes, I do agree that there is irresponsible lending and borrowing going on but I have to argue that the behaviour would not have been possible had CMHC not had the lending policies that allowed this behaviour to happen in the first place! The government is trying to put a break on this and reverse the problem but I think they are going a little too far in the other direction!

In my opinion, the government shouldn’t have been so liberal during the boom, and shouldn’t backtrack by being overly restrictive now. How can an economy get it’s mojo back with so many restrictions?

It will certainly be interesting to see where these latest changes take us. The Bank of Canada has a scheduled interest rate announcement tomorrow so stay tuned!

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