Canada's Measures to Curtail U.S.-Style Lending Excesses Seem Unwise

Zero-down and 40-year mortgages will no longer be insured by Canada Mortgage and Housing Corp. [CMHC] after Oct. 15. According to a Finance Department press release, a homebuyer in Canada will only qualify for a government-insured mortgage if they meet the following conditions:

• minimum downpayment of 5% 
• maximum amortization of 35 years
• minimum credit score of 620
• total debt service ratio under 45%
• properly documented loan application

The measures reportedly are aimed at curtailing U.S.-style lending excesses, but isn’t the Canadian housing market already “coming off the boil” and doesn’t this tightening of standards elevate the risks of a U.S.-style collapse? That’s probably the first thought homeowners and buyers have when they hear of the changes.

Actually, short term, it could have the opposite effect and produce a rush to buy houses by those who want to finance with zero-down, 40-year mortgages before the Oct. 15 deadline. In the medium term, the changes could undermine the market -- but not by any great extent I believe:

1. Most buyers who would have financed with 40-year amortizations should easily be able to shift to 35-year periods given monthly mortgage payments don’t increase by much (only by $41 for a $200,000 mortgage at 6%).

2. Financial innovation came late to the Canadian mortgage market (Fall of 2006) and to a lesser extent, so irresponsible lending is still a small percentage of the total (subprime mortgage origination is less than 5%) and the impact of it tapering off shouldn’t be felt much.

3. The International Monetary Fund says Canada has one of the lowest levels of home price overvaluation internationally, and its housing market is well supported by low interest rates, rising incomes and a growing population.

4. No-money-down and 40-year mortgages will still be availabile -- e.g. U.S. institutions operating in Canada, such as Wells Fargo (WFC), apparently will still offer them (from what I have heard).
 
Over the long term, the lending restrictions should be supportive of the market by reducing the number of defaults that could drag down house prices during any slowdowns.

Comments

[AmesTiedeman]

No person should be allowed to buy a home with ZERO down. The simple rules for the U.S. should be this:

1. 20% down and you get say, 6.00%,
2. 10% down you get 7.00%
3. 5% down you get 8.00%
4. You cannot put ZERO down
5. Credit score must be above 650
6. All credit data must be verifies, including employment and income
7. Only 15 and 30 year fixed rate mortgages are allowed
8. All taxes and insurance must be impounded monthly.
9. All payments must be direct debit with 50% coming every two weeks.
10. No person should be allowed to have a debt ration greater than 40% of their income on debt service.

[pitchingpennies]

Well Ames, I'm sure glad you ain't runnin' the show.