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August 8, 2017 | Stress

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.

Year after year the screws have tightened on kids trying to buy houses. People with less than 20% to put down have been mercilessly squeezed in the belief they pose the greatest risk when the inevitable market-toppling events occur. So for them 30-year loans are kaput. Expensive mortgage insurance is mandatory. Stress tests mean they have to qualify for rates they don’t pay. Source of funds must be proven.

What’s been the result?

Simple. Insured mortgages (those with lower downs, also called ‘high-ratio’) have shrunk drastically. After the moister stress test came into effect a few months ago the volume of CHMC-insured loans crashed 41%.

But house sales didn’t crash. In fact, until weeks ago, they were steamy. Seems the stress test was so onerous buyers have found their way around them, securing that prized 20% down payment through gifts, private loans, sub-prime borrowings and, especially, the Bank of Mom.

So here’s the result. And in a moment, the astonishing government response nobody’s ready for.

As a direct result of burning the kids with over-regulation, a giant pool of mortgage risk has been created. Half of all the mortgages on the books of the big banks are not covered now by CMHC insurance. Eight in ten new mortgages being made in the GTA or YVR are not insured. A stunning 50% of all these uninsured mortgages not only have 30-year amortizations but equal 80% of the value of the homes financed. Uninsured mortgages are growing by 15% a year while insured ones fade fast. Almost a third of all these uninsured bank mortgages are to people whose debts equal at least 450% of their incomes.

In other words, the feds took high-ratio real estate risk and shoved it elsewhere. Now they’re panicking, and about to bring down a new hammer affecting everyone.

The bank regulator (OSFI) intends by the end of this year to force the banks into stress testing all borrowers – regardless of how much money they have for a down payment – including people who are renewing. The test will involve ensuring they have enough income (and secure employment) to make their mortgages payments at current rates plus 2%. It’s estimated by RateSpy guy and mortgage broker Rob McLister that this will “slash buying power for prime buyers by roughly 18%.” And just imagine what that’ll do to house prices already under pressure.

But it gets worse.

The stress test of rate+2% will become rate+3% for anyone renewing a mortgage where the value of their home has decreased and they no longer have 20% equity – or if the financial stability of that borrower has changed (think divorce, or a spouse on unpaid mat leave). In order to retain the lender’s financing, some additional money might have to be ponied up to bring the loan-to-value ratio back into line.

The impact?

Depends on who you listen to. A poster here last week whose job makes him privy to such things says: “This means a minimum reduction in mortgage credit of about 17 % up to 22 % and substantiates anecdotes of lenders instructing appraisals to come in 20% (or more) light. If so, the 17 % to 22% reduction in available credit will apply to a market now down approximately 19% on average and which will be down how much more by the time this is implemented. We could therefore see that 40 to 50 % drop by year end as that “Guru” poster stated last month on this blog.”

For his part, McLister is dark. The change, he suggests, will mean slashed buying power and therefore an inevitable haircut in home prices. “OSFI’s much tighter credit policies could conspire with other factors (e.g., rate hikes and debt loads) to kill a portion of demand and jeopardize equity for 70% of the Canadians who own. That soft landing we all hope for could harden up, tout suite.”

The mortgage veteran also says the changes will drive more borrowers into the arms of less-regulated credit unions and subprimers like Home Capital where no stress test exists, but loan interest rates are far higher. That, he states, “just accelerated the coming retirement crisis by five years” and increases overall economic risk.

Well, there you go. The latest from your government. They call it a stress test for a reason.

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August 8th, 2017

Posted In: The Greater Fool

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