Spotlight On Mortgages: November 29, 2013

Spotlight on Mortgages

It seems like everyone has an opinion on the state of Canada’s housing market. The International Monetary Fund, a global organization that monitors the world’s economic activity, has added its prescriptive voice on the right direction for Canadian central interest rates and economic growth.

According to the IMF’s latest Canadian economic report, the Bank of Canada is in a position to maintain its benchmark rate at one per cent, where it has remained since September 2010, until Q1 2015 at the earliest. This is yet another challenging stance to the OECD’s statement last week that the BoC is best advised to hike rates starting next year, up to 2.25 per cent.

The Economy Will Start To Recover – Finally

Canadians will be granted a longer low rate grace period due to a doubling in economic growth next year, as exports finally rotate in to relieve the pressure on household spending. The organization stated, “Policymakers can afford to wait before starting to raise policy rates towards more normal levels. The slowing trends in construction activity, house prices, and household credit, together with the projected increase in long-term rates as the Fed gradually exists from QE, also give the Bank of Canada more room to wait before raising policy rates.”

CMHC Seen As High Risk

Despite the glowing projections for our nation’s growth, however, the IMF does have a bone to pick with the CMHC – specifically, how the Crown Corporation backs 75 per cent of high-risk mortgages in Canada.

The organization says such an onus in turn exposes the government, and taxpayers, to economic shock; as of Q3 this year, CMHC covers $560 billion in mortgage default insurance. Such coverage is mandatory for all homeowners who pay less than 20 per cent down when they buy their home – such little secured capital paints them as higher risk in the bank’s eyes. Should these homeowners default on their payments, however, it’s the government who is 100 per cent on the hook for covering the cost.

The IMF argues this set up is irresponsible – should an economic event, like a second recession, hit Canada and cause owners to default on their mortgages en masse, it would have a catastrophic effect on Canadian coffers. While the chances of this are highly unlikely, it’s not outright impossible – and the IMF suggests that private insurers, like Genworth, make up a larger portion of the market share.

Canadians Are Better At Paying Down Debt

Perhaps the IMF is selling Canadian consumers a bit short – some of the most recent debt data shows we’ve been cleaning up our act. A new study from Equifax indicates that while consumer debt has increased by 3.7 per cent (excluding mortgages) from 2012, we are getting better at paying it off – delinquency rates on bill payments dropped to 1.3 per cent in Q3, compared to 1.22 per cent year over year.

 And the CMHC itself has reported improvements in high risk home buyer behaviour – Q3 total insured volumes (for the first nine months of the year), have declined by 14 per cent. The report attributes the drop to a shrinking high ratio market; homebuyers are still recovering from last summer’s mortgage affordability rules, and are saving longer for their down payments. Mortgage arrears are also down to 0.33 per cent – a 0.2 per cent improvement from last year’s levels. Most telling of all, however, is the reported average credit score for qualified buyers at 741 –  a sign that buyers in general are responsible about their debt.

What If There Was No CMHC?

While the IMF didn’t suggest the outright dismantling of the Crown Corporation, reduced access to government-backed funds would absolutely affect home buyers, particularly those in the cash-strapped first timer segment.

– Rates could increase. Without the government picking up the slack for home buyer’s securitized capital, banks will view those buyers as an even higher risk, and they’ll be offered less competitive rates as a result.

– Home owners may be forced to save longer in order to pay their full 20 per cent, and avoid high-ratio status.

– Mortgage qualification may depend more heavily on credit score, meaning those with financial skeletons in their closets may be hard pressed to get their financing.

Week In Review


Related Topics

Mortgage News / Mortgages

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