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August 23, 2017 | After Mom

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


When a reporter asked me this week what major cities housing refugees from Vancouver or Toronto should explore to find “a bargain”, the answer was simple. None. There are no bargains just before real estate values decline. Only wealth traps. Especially for first-time buyers who cannot afford losses.

The reason is simple and it’s called B-20. The forgettable name is “Residential Mortgage Insurance Underwriting Practices and Procedures” and it emanates from the banks’ regulator, OSFI. Freaked out at the size and growth in mortgage debt, along with what looks like a rapid decline in the quality of that debt, OSFI has proposed tough new borrowing guidelines which it says, “will be issued in autumn 2017, and will come into effect shortly thereafter.”

It sure looks like a game-changer, as this pathetic blog heroically explains. The main consequence will be a stress test every person taking out or renewing a mortgage must pass, proving they can afford payments at current rate +2%. If financial circumstances have eroded or house equity faded, it’ll be current rate +3%. If you want a home loan from one of the Big Six, that’s the rule sometime after Thanksgiving.

Why is this happening?

Because (a) interest rates will be upped by the Bank of Canada another four to six times over the coming years, (b) mortgage debt is out of control and a third of borrowers say last month’s single quarter-point hike is already hurting them, and (c) down payment money from the Bank of Mom has completed screwed things up. Parental cash has purposefully skirted rules designed to protect people from borrowing too much. It’s love gone awry.

For years now anyone with less than 20% down has had to buy mortgage insurance – protecting the lender from default. Knowing rates would rise, the feds brought in a stress test last year to ensure these insured borrowers could make payments if loans rose 2%.

Of course, large numbers of them couldn’t. The way around it was to get enough cash (somewhere, anywhere) to crawl over the 20% line. That way their loans would be uninsured. No test. No stress. As a result, CMHC-insured loans plunged more than 40%. The proportion of uninsured loans soared. Now the big banks have mortgage portfolios fat with the debts of first-time buyers whose borrowings should have been covered by CMHC, but are 100% the liability of the lenders, should spit hit the fan. This worries OSFI hugely.

As reported here, uninsured mortgage growth is 14% a year. Huge. Eight in 10 mortgages in the GTA or YVR – the most inflated markets in the galaxy – are uninsured (thanks, mom), and half have 30-year amortizations, suggesting the borrowers couldn’t handle payments on 25-year plans. Almost a third of all these uninsured borrowers have debt-to-income rations of 450% or more. Gulp.

Summary: Insured loans went down 41% at the same time real estate activity rose, the number of borrowers increased and overall mortgage debt swelled. This did not happen because incomes spiked, but because the rules were broken. The money flowed from other sources – family or subprime lenders, with the borrowers then lying to the banks about the source of it. That way they qualified for 80% first mortgages, avoided CMHC insurance and ended up with extreme leverage – all to buy assets at peak price.

The bundling of down payment loans with bank loans violates federal law. It puts the banks at greater risk. And in the GTA, where prices have fallen about 20%, thousands of these buyers have seen 100% of their equity evaporate and are now under water.

So everyone will soon face the stress test, regardless of how much you’re putting down, or what equity is in the home upon renewal. People will qualify to borrow less. The mortgage industry figures about 18% less. So it’s fair to assume that’s the next drop in prices – everywhere. From Halifax to London to Kelowna.

Yes, there will still be ways around it – such as borrowing from your local, crazed credit union where real estate exposure is extreme and regulations relaxed. At least for now. But because the Big Six dominate the residential mortgage market, the impact of B-20 changes cannot be understated.

Meanwhile the average down payment gift from parents to moisters in households making $100,000 or more is now over $40,000. Let’s hope Mom has a bunch more money to bail junior out when prices fall, rates rise and that first loan renewal comes round. Stress, baby.

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August 23rd, 2017

Posted In: The Greater Fool

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