Last week it was widely reported that the CMHC – the largest mortgage default insurer in Canada and a crown corporation – was approaching its exposure limit. The insurer is subject to a $600B cap on the amount of insurance it can issue per Canadian regulation. 
Mortgage insurance is required on all mortgages with down payments between 5-20%. It is also required on the mortgages of ‘untraditional’ borrowers such as the self-employed and immigrants to Canada.
As the CMHC approaches its exposure limit, it is contemplating areas where it can essentially ‘cut’ its services, and these areas primarily affect untraditional borrowers.
- Self-employed mortgages. In the first three years of business a self-employed Canadian can simply “state” their income (called Stated Income mortgages) within reason and provide proof of business registration. They are then subject to a higher down payment minimum (10%) and mortgage default (CMHC) insurance premium.
- New to Canada (immigrant) mortgages. Mortgage applicants who are new to Canada must prove their income, provide a letter of reference from their country of origin, and show sufficient credit history for down payments of less than 35%. There may be some perceived risk with those applicants who are not permanent residents as well as those who do not have to prove their income beyond the 35% down payment.
- Mortgages on Condos. Right now lenders only include 50% of condo fees in calculating debt-to-income ratios on applicants seeking mortgages on condos. Some could argue 100% of condo fees directly impact an applicant’s affordability and should be accounted for in the mortgage application as well.
When news broke of the CMHC exposure last week, the media jumped on it en masse, sometimes comparing the lending standards on the above aforementioned mortgage products to American subprime mortgages. Although one could reasonably take issue with how Stated Income self-employed mortgages are currently being handled, likening the market to the subprime mortgage crisis is a bit out of line.
First off, the labour market is roughly about 13% self-employed and only a limited number of those included would be in their first three years of business, and even fewer would be seeking a mortgage at all and with a small down payment. We obtained a letter sent out from the CIBC, PC Financial and Firstline mortgage group to mortgage brokers stating that only 3% of the lender’s total book value last year consisted of Stated Income programs. Compare this to the reported 20% of American borrowers with sub-prime mortgages in 2007 often requiring no income verification or down payment.
Still, the Canadian self-employed stated income mortgage is the area of most exposure and concern – and one that has reportedly already been addressed by lenders.
‘I do a lot of self-employed mortgages’ says Janet MacDonald of the Mortgage Professionals in Kingston, Ontario ‘and lenders have definitely become more conservative in the last few months.’
The risk perceived with New to Canada (immigrant) mortgages is less clear. Proof of income is required up to down payments of 35% or less as well as a letter of reference from the country of origin, and the applicant must have sufficient credit history.
Christopher Molder, a mortgage broker with The Mortgage Centre – Tridac Corp., thinks the attention on these mortgage programs are driven by ‘political motives.’ He believes with the record levels of household debt being reported, the government does not want to appear reckless by raising the CMHC exposure limit. Molder, however, thinks the debt problem lies at the branch level with lines of credit, credit cards, and other such products.
Another area of contention but not so widely reported is that of condo fees, which are currently only 50% accounted for in debt-to-income calculations by lenders.
One could argue by only including 50% of a clear monthly debt obligation is not a true representation of affordability, but not everyone agrees.
Brian Persaud, a Toronto condo realtor and author of ‘Investing in Condominiums’, points out similar maintenance fees are not accounted for with a freestanding home in affordability considerations and they can run ‘quite substantial when you are responsible for structural, plumbing and electrical problems that arise.’ Plus, he says the market adjusts for condo fees in unit prices: condos with higher maintenance fees typically come with a lower price tag and vice versa.
It’s still unclear what actions will be taken by the government to further tighten mortgage lending (last year the maximum amortisation on insured mortgages was reduced from 35 to 30), but it seems like there is a good possibility actions will be taken. Perhaps the focus, however, should shift to other lending products too if the government really wants to tackle the household debt problem.