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Canada’s housing agency said yesterday it was tightening its rules to get mortgage insurance, a move some observers say is poor timing when the economy is reeling from the coronavirus shutdown.
Among the changes that take effect July 1, Canada Mortgage and Housing Corporation is raising the minimum credit score from 600 to 680.
• The maximum gross debt service (GDS) ratio, the share of income devoted to housing costs, including mortgage, taxes and heat, falls from 39% to 35%, and total debt servicing falls from 42% versus as much as 44% now.
• In order to curb the practice of borrowing money for down payments, the agency also said unsecured personal loans and unsecured lines of credit will no longer be treated as equity for insurance purposes.
Observers say the stricter rules are overkill and will further dampen an already struggling housing market and economy.
“Suffice it to say that this batters buyer and seller confidence and, all other things equal, has a net negative impact on the near-term housing outlook. Most importantly, in my view, these changes are unnecessary to protect the prudence of Canada’s home lending practices,” said Dr. Sherry Cooper, chief economist at Dominion Lending Centres.
The housing agency raised eyebrows recently with its pessimistic prediction that the coronavirus would cause home prices to fall by 9% to 18% over the next 12 months. It also warned that 15% of existing mortgages are now in deferral and that there is a risk of 20% of mortgages being in arrears when these deferrals end.
“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said Evan Siddall, CMHC’s President and CEO said in a press release yesterday. “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”
Cooper points out that besides being more pessimistic than other forecasts, including the Bank of Canada’s, the agency itself “acknowledges the high degree of uncertainty associated with any forecast at this time.”
The economist said that mortgage delinquencies are “meagre” and the Bank of Canada is forecasting they will remain at less than 1% of all mortgages. Moreover, the recession assures that interest rates will remain very low over the next two years.
“The biggest risk is the hit to market psychology due to the timing,” Rob McLister, founder of RateSpy.com, a mortgage comparison website, said in an email to Bloomberg. “Regulators usually make such changes when times are good, not when housing is teetering on the edge.”
James Laird, co-founder of Ratehub.ca, said the changes that will have the biggest impact are the reduction in the GDS limit and credit score. Because of these changes Ratehub estimates Canadians who need this insurance will see their buying power reduced by almost 12%.
Ratehub said that under the current rules a family with an annual income of $100,000 and a 10% down payment could qualify for a home worth $524,980. Under the new GDS limit of 35, the same household can now only afford a home of $462,860.
CIBC economist Benjamin Tal said the impact of the changes will be “very narrow but deep.” Lowering the debt service ratios will only affect about 5% of the market and the raising of the credit score just over 1%. About 15% of down payments are borrowed, he said, but CIBC considers the ban on “non-traditional” sources for these funds “to be the least effective due to implementation issues.”
However, “For the small portion of borrowers that are touched by the move, the impact is very significant, potentially lowering purchasing power by more than 10%. It is unclear if private insurers will follow CMHC’s move. But even if the do, that will not increase the impacted portion of the market notably since we estimate that their concentration on credit score below 680 is lower than CMHC’s,” wrote Tal.
All homebuyers with less than a 20% down payment must obtain default mortgage insurance. About 35% of Canadian banks’ mortgages are insured, with CMHC, the top insurer. Cooper said anecdotal reports suggest that it is likely that private default insurers will not match CMHC’s lower debt ratios. “They might, however, be more selective in their approval processes,” she said.
With files from Bloomberg
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THE CLASS OF 2020 Makayla Sneddon poses for a high school graduation photo outside the Alberta Legislature in Edmonton this week. She will be graduating from Morinville Community High School in Morinville, Alberta during the COVID-19 pandemic. Alberta has completed the first phase of its economic relaunch with retail shops, restaurants, day cares, barber shops, hair salons, farmers markets and places of worship reopening with some conditions. Outdoor gatherings are limited to 50 people, and indoor gatherings to 15. Larry Wong/Postmedia
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- B.C. Finance Minister Carole James takes questions on latest B.C. employment data from Statistics Canada
- Today’s Data: Canadian labour force survey, U.S. non-farm payrolls, U.S. consumer credit
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Since bottoming out in March, the Canadian dollar, aka loonie, has led gains by G10 currencies, piling on an astonishing six cents — four cents in the past month alone. This morning the loonie was at 74.08 US cents. Of all the factors fuelling this rally, the decline of the U.S. dollar, aka greenback, is probably the biggest, explains the Financial Post’s Victor Ferreira. Growing optimism has turned investors away from safe havens and towards more risk like the loonie. But don’t get too comfortable. Many believe the current optimism about the economy and earnings is overblown and when reality kicks in, investors will run, not walk, back to the U.S. dollar. Analysts say the rally could take the loonie as high as 75 cents before the reality check drags it back to 72 cents.
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Three months into the coronavirus pandemic and the S&P 500 is up 5.5 per cent. All the screaming bargains of the earlier stock selloff have been snapped up, so the big question is what do you invest in now? Ted Rechtshaffen offers some insight here into the investments you should consider adding to your portfolio right now.
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Today’s Posthaste was written by Pamela Heaven (@pamheaven), with files from The Canadian Press, Thomson Reuters and Bloomberg.
Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.
https://news.google.com/__i/rss/rd/articles/CBMiO2h0dHBzOi8vYnVzaW5lc3MuZmluYW5jaWFscG9zdC5jb20vZXhlY3V0aXZlL21vcnRnYWdlLXJ1bGVz0gE_aHR0cHM6Ly9idXNpbmVzcy5maW5hbmNpYWxwb3N0LmNvbS9leGVjdXRpdmUvbW9ydGdhZ2UtcnVsZXMvYW1w?oc=5
2020-06-05 19:26:00Z
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