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On July 9, the Government of Canada announced that mortgage market regulations would tighten later this year to ensure a healthy housing market and reduce the risk of a US-style housing bubble from developing in Canada. Effective October 15, 2008, government-backed mortgage insurance will only be available on mortgages with an amortization period up to 35 years; currently, the maximum amortization period is 40 years. Additionally, government-backed insurance will be limited to mortgages with a loan-to-value ratio up to 95 per cent, down from the current 100 per cent. Other regulatory changes include the establishment of a credit score floor, loan documentation to ensure there is reasonableness of property value, borrower's sources and level of income. Mortgage insurance on high-ratio mortgages that don’t require amortization in the first few years from the government guarantee (i.e., interest only products) won’t be backed, and a maximum of 45 per cent on a borrowers' total debt service ratio will be set. The new regulations apply only to new mortgage originations, while existing originations will be unaffected. The lag period prior to the regulatory change will allow existing mortgage pre-approvals to be used or expire. All mortgage insurance companies will be affected by this regulatory change. As Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation, the government is ultimately responsible for CMHC's obligations, including mortgage insurance claims. Hence, CMHC will no longer offer 40-year amortization and 100 per cent loan-to-value ratio mortgage insurance products, given the new regulations. In addition, the government also backs private insurers' obligations to lenders in the event of default, provided the business is eligible to the guarantee, but claims are subject to a 10 per cent deductible of the original principal amount of the loan agreement. Private insurers include firms such as Genworth, United Guarantee and PMI. Private insurers are still free to insure 40-year amortization and 100 per cent loan-to-value mortgage products, but the lack of government backing will lead to sizeable increase in risk. This may mean the elimination of these products after October 15, or a higher insurance cost for the borrower. Market Impact The tightened mortgage market regulations are likely to dampen housing demand over the longer term. However, a short-term boost in housing demand may occur during the next three months, as some low-equity buyers speed up their purchase decisions before the new regulations come into effect. The reduction in the maximum amortization period from 40 to 35 years will mean higher monthly and annual payments, but the impact will be relatively modest. However, for zero equity buyers, the move away from government-backed insurance on 100 per cent loan-to-value ratio mortgage to 95 per cent, will mean greater difficulty in purchasing homes. For example, for a $300,000 home, a buyer would need a $15,000 down payment to qualify for government-backed mortgage insurance, in addition to a qualifying income. Low-equity buyers may still fund the 5 per cent payment from other sources, such as through bank loans, lines of credit and family, but this five per cent won’t be insured, and the cost of credit may be higher than the mortgage rate.
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