By Penny Elizabeth Dutkowski, Broker
Yesterday, the CMHC announced it has completed the review of its homeowner and multi-unit mortgage business and will be initiating two new changes. Chief among the reasons cited were: “increasing market discipline” in residential mortgage lending while reducing taxpayer exposure and the
restraining of the growth of taxpayer-backed mortgage insurance in line with
the government's 2014 Economic Action Plan.
1) Effective immediately loans for the financing of
multi-unit condominium construction is discontinued. The change does not affect
the purchases of individual condominium units.
According to the CMHC, the insurance-in-force for this product is $378 million. The demand for this product since its 2010
introduction has been low with no multi-unit insurance extended since 2011.
2) As of July 1, their low and high-ratio transactional
mortgage loan products will be aligned by the establishment of maximum house
prices, amortization periods and debt servicing ratios.
This is aimed at lenders who until now were able to purchase CMHC
insurance for (non-portfolio) low-ratio mortgage loans (downpayments greater than 20%) that would normally be exempt
from mandatory insurance. This change means
that in order for these low-ratio mortgages to be eligible for insurance
they’re subject to the same high-ratio eligibility requirements: $1 million
purchase price limit; Gross Debt Service of 39%; Total Debt Service of 44% and
an amortization term of 25 years.
These changes do not affect private insurers.
OPINION:
The $378 million insurance-in-force still on the books for condominium
construction is small which I surmise
should run off in under 7 years or less as the buildings are completed and their units
sold.
While the CMHC notes that the second change amounts to only
3% of its insurance-in-force, it’s known within the real estate industry that
lenders often availed themselves of this insurance for loans made to multi-unit investors
and purchasers of second properties, essentially unburdening their capital reserves in the process.
This 3% plus the 3% from changes announced April 28th may be small but
they now account for about $32 billion of insurance-in-force.
Since CMHC’s announcement specifically referred to
completing their review of its homeowner and multi-unit mortgage products, presumably they'll be no further changes to the homeowner products in 2014 which leaves the Portfolio Insurance - a means by which lenders can securitize
bulk loans which at March 31, 2014
stood at $400 billion. Changes to the Portfolio (NHA/MBS) products should be
coming in short order considering the 2013 Economic
Action Plan noted that “the government would implement new measures to increase
market discipline” for those.
OSFI gained audit oversight of the CMHC almost two years ago. As one whose past managerial accounting with insurance carriers made
me well familiar with OSFI’s rigorous and stringent audits, it’s not illogical
to conclude they’re behind all the changes and as long as they continue to have
oversight of the CMHC, we should see many more improvements.
The end result of all these changes to date bodes well for
at least stabilizing the current level of the CMHC’s insurance in-force if not
reducing it.
It seems the government’s aim is to do just that and kudos to Mr. Harper and to the late Jim Flaherty.
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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