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Not All New Rules Are Old Rules

mortgage-rules-2012In the last four and a half years, federal regulators have instituted more than two dozen mortgage-related policies and regulations. It’s a well-intended attempt to engineer a market correction (the proverbial “soft landing”) and add stability to the housing market.

There’s been much debate over the extent of recent rule tightening. But only time can tell if Ottawa’s policy-induced downturn takes hold, and if it was the best course for the economy.

Despite that, many armchair analysts have already taken their position without seeing the outcome. Some of these folks have downplayed the array of recent mortgage restrictions, arguing that they are simply old rules made new again.

Market share analysisThat is partly true for things like amortization length, down payment size and debt service ratios.

But many of the new mortgage rules actuallyare new, or they haven’t applied for over a decade. Here are a few examples:

  • Mandatory qualification rates on all terms less than five years
    • Someone getting a 4-year fixed, for example, must now prove he/she can pay an interest rate of 5.14%. If a 5-year term is chosen instead, that bar drops to ~2.89%.
  • Stiffer documentation requirements—especially for self-employed borrowers
  • Various securitization-related restrictions
  • 80% loan-to-value refinances
    • 90% LTV refis with unrestricted use of funds were introduced in 2001. Prior to that, homeowners could use their home equity “for housing-related purposes such as renovations,” says CMHC.
  • Stricter treatment of rental income
    • Generally speaking, borrowers must now use less of their rental income to qualify for a mortgage.
  • Stricter credit score requirements (with fewer common sense exceptions)

Some of the above rules are clearly sensible and necessary, but all of them are brand new or “newish.” For that reason, it is inaccurate to characterize recent policy tightening as merely bringing us back to the way things used to be.

(As a side note, some forget that we used to have 35-year amortizations for first-time buyers in the 70s, a higher frequency of second mortgages behind conventional first mortgages, and no price ceilings on low down payment mortgages.

In any case, each of the above new regulations have combined with re-instated debt ratio, down payment amortization, rental, and HELOC rules to slow the market even further. Hopefully Ottawa is content to see how real estate and the economy respond before adding more pages to its rulebook.

Rob McLister, Canadian Mortgage Trends