Government changes mortgage rules for CMHC

The federal government is taking action so Canada can avoid the kind of sub-prime mortgage meltdown plaguing the United States. Effective October 15^th, 2008, 40-year mortgages with no money down will no longer be covered through the federal government insurance program administered by Canada Mortgage and Housing (CMHC). Instead, the longest amortization period for a Canadian mortgage insured by CMHC will be 35 years.

In addition, a buyer insured by CMHC will have to make a minimum down payment of five per cent of the home's value. Canadians already holding 40-year no-money-down mortgages won't be affected by the changes.

The regulations will apply to federal agencies such as the Canada Mortgage and Housing Corp., which has an estimated 60 per cent share of the mortgage insurance market. However, private-sector mortgage insurance rivals such as Genworth Financial, PMI Mortgage Insurance Co. Canada and AIG United Guaranty are free to offer the product.

One difference is that the federal government will no longer provide insurance that protects lenders in the event of a default by the insurers.

“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 Finance Department said in a statement.

Existing 40-year mortgages will be grandfathered, a Finance Department spokesman said. In 2006, the maximum amortization period was extended to 40 years from 25, and longer-term mortgage products have become increasingly popular with buyers looking for lower monthly payments as the price of Canadian homes soared.

In 2007, 37 per cent of new mortgages were for terms of longer than 25 years, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP). But while longer amortizations stretch out monthly payments, they also greatly increase the cost of a mortgage over its lifetime. For example, the total interest on a $300,000 mortgage can soar from $286,161 over the life of a 25-year mortgage to $498,416 over a 40-year amortization period – adding more than $200,000 to the cost of the home.

This, combined with the fact that these mortgages are often combined with little or no equity, raised alarm bells with policy makers looking at the turmoil that took place in the U.S. when house prices started to fall.

According to analysts, the Canadian housing market would have slowed sooner if longer- term amortizations had not been introduced. The longer amortizations mean much greater interest costs over the life of the mortgage, but smaller monthly payments, which allows buyers to bid on a more expensive home than they otherwise could afford.

Bank of Canada Governor Mark Carney said in May he was concerned about the prevalence of long amortizations. "They add to the momentum in the housing market, and if everyone has a 40- year amortization mortgage, then you just have higher housing prices."

“We've seen an inclination now, a trend, toward longer-term amortizations and smaller down payments, and that is a matter of some concern,” Finance Minister Jim Flaherty said in a speech in May. Mr. Flaherty was not available for comment Wednesday.

Jim Murphy, president and chief executive of CAAMP, said in talks with him the government expressed concern about the risky lending products that collapsed the U.S. housing market. The Finance Department was also worried about the future impact of competition between mortgage insurers, which led to the introduction of 40-year mortgage in 2006, Mr. Murphy said.

“I think you have a clear case of the government sitting down and looking at its risk exposure and wanting to review that. They have financial guarantees in place for the CMHC and private insurers, and they were saying, ‘What is our risk, and what is the risk to the Canadian taxpayer?' ” he said.

Reaction from the industry was mixed. “CMHC supports the new parameters … . We also support their efforts to maintain the strong Canadian housing market,” said spokesperson Stephanie Rubec, adding CMHC will stop insuring 40-year and zero down payment mortgages in October.

“It's the right move,” said Nick Kyprianou, president of Home Capital Group Inc., whose principal subsidiary, Home Trust Co., provides alternative mortgages. “Why get people overextended? Nobody wins by getting people right to the end of the cliff.”

Others, however, say home buyers and banks have been prudent with their finances, and are being punished for the more lax approach south of the border. “Things here are not like they are in the U.S. where they had those NINJA loans, no income, no job, no assets. … It's only going to hurt the consumer,” said John Panagakos, owner of Toronto brokerage Mortgage Centre.

The move actually comes at a time when the housing market has moved on to other concerns, the most pressing of which is chilling consumer sentiment due to high fuel prices, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc.

(CREA 10/07/2008)