May 13th, 2012
Imagine you’re sitting home one night eating burritos and cream cheese waiting for The Biggest Loser or Canada’s Got Talent! when the TV newsguy comes on and tells you this:
“Homeowners beware! Canadian banks may soon force you to requalify your mortgage at the end of every term, if your circumstances change… say you lose your job or get divorced, you could risk losing your home.”
Well, he just did. CTV aired this:
Banks May Force Homeowners to Re-Qualify for Mortgages at End of Every Term
Of course regular readers of this pathetic blog knew all this back in March, when we highlighted the changes that OSFI – the Office of the Superintendent of Financial Institutions (Ottawa’s bank cop) – is preparing to implement. The first stage was an announcement. The second was a discussion paper. The third will be regulation. By the end of the year it seems assured the feds will have a new set of regs for the banks aimed at squishing the credit bubble without having to jack up rates.
The changes would require far more scrutiny of a buyer’s finances, verification of a home’s true value (not the bidding-war price), elimination of cash-back mortgages and also test borrowers every time they renew a loan to ensure they still qualify. The key here is LTV – loan-to-value. If you bought a $400,000 place in 2010 with 5% down, then your mortgage is $380,000 and your LTV is 95%.
If the same place is worth $340,000 in 2015 (after a 15% correction) when the loan renews, then the LTV means the maximum loan is $323,000. If you took a 3% VRM when you bought, with a 30-year amortization and made 5 years worth of payments, then (counting in the mortgage insurance premium), you still owe $349,000 upon renewal. So, you’d have to come up with $26,000 in cash to maintain your home loan – after spending $101,457 on mortgage payments.
Let’s see, that’s a downpayment of $20,000, plus $101,457 in payments, plus a $26,000 mortgage renewal payment – or a total of $147,457 in cash for a home worth $340,000 on which you still owe $323,000. This is a nice, simple example of why all those horny young virgins with their 5% downpayments are at risk of being wiped out financially.
Perhaps you see the threat here.
It’s not just that the bank cop would bring in such a draconian change (and it will), but that the potential of its happening has hit the MSM. Your granite-loving mother-in-law can ignore this marginal, slightly diseased blog, of course, but when it’s on the TV it becomes just as real as The Bachelor.
So the big threat to all those recent purchasers is a market decline plunging them into negative equity event before OSFI gets all Nazi on us. Homeowners with 20% or 40% equity can withstand such an event (although they won’t be happy they’re less wealthy), but high-ratio, high-risk borrowers will end up with nothing but debt. Are they mentally prepared for that? Did the kids buying those townhomes and condos with cash-back downpayment money from TD Canada Trust really consider that they’d be, well, screwed?
Of course not. Never crossed their mind. And the nice loans officer at the bank skipped mentioning that part. In fact, homeownership has been sold by the banks, the real estate industry, the media and even governments as a risk-free strategy. So what happens in a couple of years when prices correct, lending rules tighten and equity leaves town? Will the kids just shrug and keep on with their monthlies? Or will they panic, bail at any cost, and drag down market values?
If you say it doesn’t matter much because there aren’t that many of them, think again. Consistently over the last three years, the majority of new mortgage originations have been for 5% down deals. In cities like Toronto, where 2,000 condos a month are flogged, you can bet the ratio’s dramatic.
In fact, even in a market where first-time buyers are a distinct minority, like Kelowna, the numbers give pause. First-time buyers accounted for 21% of all transactions in 2011, and of those about 90% used high-ratio financing, with downpayments of less than 20%.
So, if Kelowna prices correct by 20% (that seems like a no-brainer), a fifth of all the people who bought last year could be underwater. Is this likely to have a further dampening effect on the overall market? Are you kidding?
Finally, one more reason this real estate market is cooked. Especially in BC. Buyer disgust.
This past weekend one of the Vancouver papers ran pictures of the 35 cheapest houses currently for sale on the west side. I rest my case.
I don’t at all aim to be alarmist, or sensationalist.
More the researcher/ messenger discussing and exposing issues that affect all of us. This looks like it is going to get REALLY UGLY. Make sure you watch the video….real people with real dilemma. The article is quite self – explanatory, BUT how many people are even aware of what is going on behind the scenes ?
What disgusts me is , IMHO, this was a long – term trap set up, and it will be a fiscal tsunami that will affect us ALL, either directly or indirectly.
As I have pointed out in past posts, what happened in the US and elsewhere would ultimately affect/infect Canada, with BC most likely being the most affected by the housing bubble collapse.
People were sucked into a corrupt system, being seduced by cheap credit, low downpayments and long term mortgages, pre-sales etc.
Simply = Recipe for DISASTER.
Those of us that follow this issue scratch our heads about people barely out of University …even High School…..buying $500,000 condos ? Downpayments with credit crowds ? Then……at the other end…. highly paid professionals saying they can’t afford to live here. What is wrong with this picture?
All indication are the market has flattened. Garth Turner posted several days ago that not one Richmond home sold for asking price…aka = NO bidding wars. While that could imply is asking prices were too high, I would suggest it is the beginning of the end of this unsustainable bubble .
I am not saying that purchasers, especially young and naive were forced to buy, it is called “personal responsibility” and are somewhat at fault. However,that does not mean the Gov’t and the CMHC should be like drug pushers. If they don’t supply the “drugs”, and perform a gatekeeper and regulatory role,the situation would not reach this critical point.In the past, they did exactly that, and cool down hot overleveraged economy by raising interest rates.
As the video shows, numerous purchasers will be under much greater scrutiny as they renew mortgages, the free-wheeling days are OVER. Sober reality kicks in.
Now, these parties who bought the bubbles snake oil will have sleepless nights about “WHAT IF….we lose out job/s, …..or divorce or….or get sick….etc. ….that bank doesn’t give a dam. Many of these parties have jobs connected to residential construction, or real estate in general. You can see where and why this is going flusssshh in a vicious circle.
For the rest of us…..this will likely result in a flood of foreclosures and thus far more supply than demand. Asian investors will NOT save us…the signs are there is similar problems in China. Once the situation spirals out of control….aka foreclosures ramp up…..I do not anticipate the banks taking over the homes and selling them…I see the EXACT SAME SCENARIO THAT PLAYED OUT IN THE U.S.
Canadian banks(which I previously posted were bailed out by the Gov’t to the tune of over $100 Billion recently ..why?)will simply cry , or threaten the Gov’t , that they will take the economy down if not bailed out, and thus get a huge Billion(trillion?)dollar bail out for mortgage default. Houses etc. will sit empty, areas will turn into slums and ghettos.
Again, if history repeats itself..we will have huge recession, if not a depression . The game plan is for Gov’t to bail out the banks and introduce austerity measure, which is why I often post what is going on in other countries.
The end result is Bankers come in and take over a country, the politicians(who allowed this to happen under their watch) who you “elect” have no power except as puppets….thus effectively a dictatorship.
IMHO Canada is not unique..its only a matter of W-H-E-N ……not IF.
All I can say is Forewarned is Forearmed, and……fasten your seatbelts.