The following two changes announced by the CMHC become effective on May 31, 2014.
Discountinued -providing mortgage insurance for more than one property.
The CMHC will only insure one property (maximum 4 units) per borrower or co-borrower. By including co-borrowers, the CMHC is disallowing anyone already with CMHC insurance to co-sign for another's CMHC insured mortgage.
This change reverses the 2005 decision to allow owners of one property to purchase a second owner-occupied home anywhere in Canada.
Revised - Mortgage insurance to the self-employed will not be provided without a traditional 3rd party validation of income.
Traditional 3rd party validation includes: a notice of assessment; audited financial statements or audited financial statements prepared by an independent 3rd party for the previous two years.
The Deadline Effect:
The change does not affect any applicants in the above two categories as long as the CMHC receives an application by May 30th. Thereafter the CMHC will disallow applicants who already have a CMHC mortgage to purchase insurance on a second property and the self-employed applicant will only qualify under the new rule.
Exclusions:
Where either of the above two applicants was previously approved for a new mortgage for a new build which will not be completed until after May 31st.
Where after May 30, an applicant in either category has sold their existing property and purchases another which will not close until after their current property is transferred to the buyer, CMHC will allow a transitional delay as long as bridge financing is arranged and the property owner has a valid and firm Agreement of Purchase and Sale on their existing property.
None to Minimal Market Effect:
There is much speculation that the Government of Canada has moved to once again cool the housing market, but as the CMHC noted, the changes affect only 3% of its portfolio. To put that in perspective, if we assume the CMHC insures 80% of all annual sales and allowing for a very generous 800,000 sales in 2013 between realtor.ca listings, housing starts and private buyers, the change affects less than 20,000 units per annum.
Being familiar with OSFI's thorough audits in my past career, it makes more sense that the change was initiated by OSFI on its second audit of the CMHC for very practical reasons unrelated to the over heated state of the housing market, four such reasons:
1) because insuring second home purchasers means a reduced in-force available for first time buyers and a faster climb toward the CMHC's in-force ceiling;
2) they discerned there was an increased risk of default by owners of two CMHC insured properties and one property insureds acting as co-signors for other insureds.
3) it's not out of the realm of possibility that OSFI's audit uncovered questionable stated income from some self-employed individuals, and finally,
4) lenders weren't doing proper due diligence to reduce the CMHC's risk with such borrowers.
Market Cooling Changes Needed:
Market prices have been climbing far too precipitously, essentially locking out first time buyers and causing others caught up in the notion that prices will continue to climb unabated, to throw caution to the wind. At some point this year, if market prices keep climbing, the Government of Canada will have to intervene to slow it, even to reverse it a tad or the market risks crashing badly all on its own within two years. Last year's CMHC and mortgage rule changes should have had an impact and probably did but not enough. ISYM suggests assigning more risk to lenders which could include:
A) Limit portfolio insurance to new mortgages where the loan to value is no more than 70%.
B) Reduce the guarantee for Genworth and Canada Guaranty to 80% from 90%.
C) Increase the minimum required downpayment by a further 5% to 10% thereby negating any cash-back scenario lenders think up.
The target in each of these is obviously the lenders. It will take nerves of steel for our politicians to face off against such a formidable group of lobbyists, so hats off to those who do.
By Penny Elizabeth Dutkowski, Broker with HomeLife/Bayview Realty Inc., Brokerage-Independently Owned and Operated.
All posts are the express opinion of Penny Elizabeth Dutkowski and should not be construed as that of the Brokerage.
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