Tuesday, April 24, 2007

New CMHC Financing Insurance Rules

Big announcement today--we'd heard rumours on other blogs, but I couldn't find anything in Hansard, so waited until confirmation before posting on this one--the Feds have reduced the minimum down payment from 25% to 20% to qualify for insurance-exempt financing.

At first I thought, uh oh, this is going to heat-up the market. But after some thoughtful analysis, I'm thinking different. I actually like this move. We're likely going to wait out this market for a bit and attempt to sock everything we can away to make that 20% mark. On an average family home using the median, not average price ($470ishK), that's closer to $100K down instead of $150K down. Much easier to attain and saving $3K or so on insurance premiums will help with a month or two's mortgage payment.

So it may help us out. But really I think it's going to help out the market. And not help the market keep going up.

20% seems like a lot on the savings side, especially in our market here in Victoria. But the Canadian average home price is significantly less than here, so saving up 20% should be considerably easier. 20% market declines are not unheard of. We may see something like this when this market cycle corrects in Canada (not just Victoria).

But here's my logic for why I think encouraging people to save is a good thing: because saving makes people financially responsible. And when people become financially responsible they will look long and hard at the market before jumping in.

But it won't be just individuals doing the looking. Banks and mortgage companies will have to look at people's credit a bit more carefully too. Think about it: if I come in with $40K down on a $200K condo most banks will give me the rest. But if the market corrects and my condo drops to $160K--and in the ensuing recession (which often coincides with RE corrections) I lose my job--it may mean the bank is left holding a declining asset and a mortgage liability without insurance. They know this better than I do, so they may exercise significantly more caution in lending me the money initially. And if I don't qualify, then that means there is one less buyer.

I'm likely stretching my logic a bit too far. But overall, I think this is likely a good thing for returning some rationalism to an exuberant RE market. Of course, you can feel free to disagree with me in the comments.

5 comments:

talus said...

This smells like a sub-prime lender tactic. I can only guess that this will boost the market now that people don't have to cough up the whole 25%.

This move by the feds may just be the thing to extend this already over-extended market.

I'm sorry but I don't see this as a good thing (and I don't have 25% down for the avg Victoria House either).

Anonymous said...

Mixed feelings about this one. I don't believe that CMHC likes the change by the Feds. It cuts into their profits and increases their exposure in defaults.

With CMHC or Genworth insured mortgages the banks could pass on the riskier loans. Now with the increase to 80 percent, those prospective purchasers would have to meet the lenders mortgage guidelines which may be more stringent - or not.

At 25% down, I could see a prospective purchaser saying "what the heck, I'll never save that amount in 10 years" and go for the high ratio financing. With 20 percent down, some prospective purchasers may hold off a little longer to save the money for the down payment.

For me, personally I like the change. I don't want to pay the insurance bandits a fee that is componded over the entire term of the mortgage for the sole protection of the lender. Even though I would probably refinance in five years into a conventional mortgage.

Siobhan

greg said...

CMHC is offloading the risk for mortgages with ratios that are close to old traditional standards back onto financial institutions.

Why should CMHC be insuring mortgages with downpayments in the 23% range? In Victoria, that would be a downpayment potentially in the $115,000 range, on a median price house.

With downpayments like that, let the banks develop their own standards as to insurance required.

It frees up CMHC from being on the hook for mortgages that are rather large, in which the buyers invested a lot of equity, if there is ever a significant downturn.

They are also helping affordability a bit by not charging the insurance on those loans in the 75-80% range anymore - so there is a little bit more juice there to support the market in a downturn.

I don't think it will matter though, because once a tipping point is reached, the market will go down no matter what CMHC and David Dodge do.

hhv said...

G&S,

are you thinking that this move was meant to keep the market bouyant? I wasn't looking at it that way... if anything, you'd have to think that they would reduce rates on high ratios for market inflationary reasons... the only people that this may help out are RE investors, which used to have to have 25% down for secondary and subsequent purchases... but they typically buy and rent, which should have the opposite effect should it not?

I can't see how this move equates to any sort of jump in market prices.

Odelia said...

People should read this.