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October 3, 2017 | Elevated Risk

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.

Well, just when real estate ‘s chilling, rates are rising and regs erecting comes word the feds would like to make it easier for the self-employed and newly-arrived to buy houses. Yes, like the home ownership rate (at 76% of those over 45) ain’t high enough already. Maybe we should strive for 100%, and beat those lousy house-horny flippy Romanians (96%).

This week, amid little fanfare, CMHC said it would soon loosen the restrictions on small business people and immigrants, since it’s unfair they have to prove income levels the way people with salaries or citizenship status do. “Right now, under our mortgage insurance policies, you have to be able to document income to get mortgage insurance, to a level of specificity that discriminates against new Canadians, because they can’t do that,” says agency boss Evan Siddall. “It discriminates against entrepreneurs, as well, because they can’t prove their income as well, so we’re looking at our own policies to try and make sure that there is more equity in our mortgage insurance programs.”

The issue is income verification, yielding a great example of how our esteemed leaders can suck and blow at the same time. Even a Dyson can’t do that.

Here’s CMHC recognizing entrepreneurs (whom T2 apparently hates) often have wildly fluctuating cash flow and inherently unstable personal finances. So the rules will be altered to allow them to qualify for insured mortgages. Same with newcomers who may have no credit history and scant employment data. More accommodation for them.

But at the same time, the bank regulator, OSFI, is on a different path – scolding the big lenders for handing out cash too leniently and warning its stress test is nigh. “OSFI expects all financial institutions to exhibit rigour in the verification of a borrower’s income as it is a critical element in the residential mortgage underwriting process,” it said in a bombshell letter to all the banks on July 7th.

Why is the bank cop being tough? Simple: “The current macroeconomic environment in Canada is characterized by elevated financial risks and associated vulnerabilities for Canadian financial institutions,” it says. “Persistently low interest rates, record levels of household indebtedness, and rapid increases in house prices in certain areas of Canada (such as Greater Vancouver and Toronto), could generate significant loan losses if economic conditions deteriorate.”

If you’ve any doubt where this is headed, give it up. The next hammer’s about to fall on housing, whacking the self-employed plus old and new citizens equally. The universal stress test so many people in the industry fear is now just 100 days away.

Top bank cop Jeremy Rudin came out swinging Tuesday saying his agency will publish its new draconian regs by the end of October, ready for implementation early in 2018. Included will be the stress test requiring any borrower – regardless of how much is put down – to prove they can carry the loan at the current rate + 2%. As I have told you, it turns 3% mortgages into 5% loans – a dramatic change from the two per cent levels of last spring.

“We clearly see the potential risks caused by high household indebtedness across Canada, and by high real estate prices in some markets,” he said in a speech in the very epicentre of frothy excess and hormonal hedonism (Toronto). “We are not waiting to see those risks crystallize in rising arrears and defaults before we act.” Clear enough for you?

The effects?

It’s anticipated there will be an overall reduction in credit extended to borrowers of about 18%. The biggest impact will be in Toronto and Vancouver where house prices have totally outstripped income growth. Less so in Regina, Montreal or Tatamagouche. Also impacted will be many people whose mortgage comes up for renewal after the new rules materialize.

If you renew with the same lender, have missed no payments, still have a job and the bank doesn’t order an appraisal, you’re good. The renewal should be automatic – but likely at a stiffer rate. If you don’t like what’s being offered and decided to switch lenders, you’ll be caught in the stress test mesh. No mortgage unless you clear the high hurdle. Thus, your bank can hold you hostage, milking you for whatever rate it can reasonable justify because your bargaining power just went to poop. Also at risk will be borrowers who took loans from Nic’s Mortgage Emporium & Under-car Oiling, who may have sold your loan to another lender after being placed.

One thing for sure: cheap loans and available credit created the bubble and made slanty semis worth $1 million. Higher rates and less credit will do the opposite.

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Days ago I shamelessly exploited this blog to try and recruit a pneumatic, dog-friendly, clever employee for my financial business. And while some might have expected a crop of deplorable, blinky-eyed, mouldy, renting, basement-dwelling candidates to emerge, this was (I can report) not the case. Instead, a tsunami of talent. Who knew so many quants, financiers and titans read this pathetic site? There were dozens of wildly qualified people to choose from, even after all the cat-owners and Kia drivers were discarded. I was humbled.

Anyway, it’s done. The new hire is perfect – a Bay Street player with experience, no pretension and a five-year-old mixed breed. The pooch starts Monday.

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October 3rd, 2017

Posted In: The Greater Fool

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