Ottawa to tighten mortgage rules

July 16, 2008

Financial Post Published: Thursday, July 10, 2008.

TORONTO — The federal government has cracked down on the mortgage industry with new rules that will make it more difficult for consumers to borrow. But many market observers think it is too little too late.

One of the key measures is a requirement that all mortgages have at least a 5% down payment. Competition in the mortgage industry has allowed consumers to put zero money down on a home and still get a competitive rate.

The government’s other key measure is to introduce a stipulation that insured mortgage products have an amortization period of no longer than 35 years. In the past two years, the amortization period has stretched from 25 years to as much as 40, with some people suggesting a 50-year amortization was next.

Any consumer with less than a 20% down payment on a home is required to get mortgage insurance if they are borrowing money from a financial institution covered by the Bank Act. The new rules affect those mortgages.

“Today’s announcement marks a responsible and measured approach by the government to ensure Canada’s housing market remains strong and to reduce the risk of a U. S.-style housing bubble developing in Canada,” the government said in a release.

“The Canadian government has modestly tightened mortgage lending rules. The changes are more about optics,” said Derek Holt, vice-president of economics with Scotia Capital.

The amortization rules will only slightly affect monthly carrying costs. The difference between a $200,000 mortgage at 6% interest amortized over 35 years, as opposed to over 40 years, comes down to $41 per month.

The new rules take effect on Oct. 15, 2008, and affect only new government-backed insured mortgages, not existing mortgage holders.

The changes come at a time when the housing market is cooling off. The Canadian Real Estate Association said last month the average price of a home sold in the country’s top 25 markets rose only 1.1% in May from a year earlier — the smallest year-over-year increase in seven years.

Phil Soper, chief executive of Royal LePage Real Estate Services, wondered why the government was only now getting around to changing the rules. “The changes are welcome but they should have been made in 2006 or at least last year,” he said.

The government will also require anybody with an insured mortgage product to have a minimum credit score.

The new rules will also require new loan documentation standards.

Ottawa insisted the housing market is in fine shape and noted the number of mortgages in arrears is stable at 0.27%, near the lowest levels experienced since 1990.

But the government does have some concerns about the market getting overheated. It was two years ago that former Bank of Canada governor David Dodge complained that interest-only mortgages were adding too much fuel to the housing market. At the time, he demanded a meeting with Canada Mortgage and Housing Corp to discuss the issue.

While the Canadian market has been more restrained than the United States, competition is credited for such new products as longer amortizations and zero-money-down mortgages.

Canadian consumers have actually been borrowing more than 100% of the value of their homes. Many financial institutions allow consumers to put closing costs, which include land transfer fees and legal bills, onto their loan. It has led to mortgages that are about 103% of the value of a home.

The mortgage-insurance industry is dominated by CMHC, a Crown corporation that controls 70% of the market. The other 30% of the market is mostly controlled by Genworth Financial Canada.

Such new entrants as AIG United Guaranty, a subsidiary of American International Group Inc., and PMI Mortgage Insurance Co. have been trying to crack the market.

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