Mortgage stress test rules

[MillerTime GFG]

Great post on a mortgage broker forum, as he brings up a good point:

I may be off the mark here but...is that new program not a conflict? The same entity that owns 5, 10% of your home is also default-insuring your mortgage on it? Say you default, all the way. Is a judge not going to look sideways at CMHC for being on both sides of your balance sheet? An equity redemption clog?

followed by...

I've been waiting to post anything as there is sooo much unknown to this hot pile of convoluted garbage.
Woops,. I just posted something.

[OMG!WTF!]

I'm not really sure cmhc foreclosing on itself is a big issue. You can default on your own home that is funded by your own rrsp. It's weird but it happens. I would wonder if the 10% share would be held in a thrid party trust that protects against foreclosure. So the 10% is priority even before the bank holding the mortgage. They can prioritize it any way they want.



I'm more curious to know if the 10% goes up or down with property values. I assume again that it would be an interest free and non negotiable term at the end. So it wouldn't change as a value. 10% becomes 2% if the value goes up and vice versa down. But I'm not sure they've determined that yet.

[MillerTime GFG]

Originally Posted by OMG!WTF!

I'm more curious to know if the 10% goes up or down with property values. I assume again that it would be an interest free and non negotiable term at the end. So it wouldn't change as a value. 10% becomes 2% if the value goes up and vice versa down. But I'm not sure they've determined that yet.

No, these details haven't emerged yet...or any details really.

[OMG!WTF!]

It is a messy weird concept. I guess they would have to be exposed to loss or at least be second to the first mortgage holder. Otherwise the first mortgage would not be able to lend on the 10% less criteria. The question then would be is the 10% holding subject to personal guarantee from the buyers the same as the principal mortgage amount is. But that would also make the first mortgage unable to lend based on the original 10% less criteria since their personal covenant is 10% less than it should be.



So I think CMHC has to be in the same boat as the homeowner, they go down together. And there is likely no upside on the 10% as people would have a fit about the government taking their tax free capital gain money. Weird idea for sure. I guess it makes it more likely people will be honest on their taxes when it comes to selling personal residences.

[Husky]

To me the issue comes to down lenders.

For example $100K purchase:
$90K bank
$10K government

What happens if someone goes to sell the house and only worth $90K? Who is first in line for proceeds? Bank or government? Same goes for a foreclosure sale - who is first as security?

[PepsiFree]

Originally Posted by Cecil Terwilliger

How about the government helping people with children they can’t afford?

How about the government helping people with hospital bills they can’t afford?

Bad comparisons are bad.

[woob]

When do these new "benefits" go into effect?

[Calgary14]

Originally Posted by Husky

To me the issue comes to down lenders.

For example $100K purchase:
$90K bank
$10K government

What happens if someone goes to sell the house and only worth $90K? Who is first in line for proceeds? Bank or government? Same goes for a foreclosure sale - who is first as security?

If someone buys a house and borrows $100K ($90K bank, $10K government as above) I would assume the bank would be first in line to get the balance owing, which I think is standard for any mortgage (not 100% sure though). So in this case the bank would get whatever is left owing on the mortgage when the house is sold, say $70K, and then CMHC would get their $10K, and the seller gets the rest (minus any fees etc).

This is all an assumption though as I don't think they've released any real details on the new program

[MillerTime GFG]

From what I hear, the insurer (CMHC) will be going in 2nd position, behind the lender.

[SofaProfessor]

Originally Posted by Weitz

Is CHMC fully funded by the feds? I don't know its inner workings.

They collect premiums and go through regular audits and stress tests. Same with the private insurers, Genworth and Canada Guaranty. Someone at Canada Guaranty once told me they basically need to have enough cash on hand to pay out the insurance on x% of mortgages they hold which was a ridiculously high number if I remember correct and the information was correct. Like if that many people defaulted on their mortgages we probably wouldn't be casually chatting here about mortgages and, instead, would be fighting in aisle 6 of the grocery store over the last can of beans.

Basically, they hold premiums and are mandated to keep so much cash on hand they can pay out a very challenging period of defaults. If things were to get even worse than that then the government would be stuck with the remaining bill.

[Husky]

Originally Posted by Calgary14

If someone buys a house and borrows $100K ($90K bank, $10K government as above) I would assume the bank would be first in line to get the balance owing, which I think is standard for any mortgage (not 100% sure though). So in this case the bank would get whatever is left owing on the mortgage when the house is sold, say $70K, and then CMHC would get their $10K, and the seller gets the rest (minus any fees etc).

This is all an assumption though as I don't think they've released any real details on the new program

it use to be like this for oil & gas but the Red water case changed this.

[81MC]

Originally Posted by Cecil Terwilliger

How about the government helping people with children they can’t afford?

As much as I don’t agree with people having children without the financial means, that really is quite different. One involves the basic welfare of children, the other involves 2500sq.ft, stainless steel appliances and a master ensuit.

As a citizen, I’m okay with money supporting one of those.

[MillerTime GFG]

Here’s what’s ridiculous about the new CMHC incentive. Example:
- 100k household income currently could buy for around 458k (quoting a colleague). This new incentive restricts people to 4X their household income, which would mean a max purchase of 400k. This means this incentive actually does not help affordability (or qualifying) whatsoever. It more-so helps people that can already comfortably do so save some cash flow.

This isn’t an affordability incentive, it’s an assistance to cash flow. This is such a strange, strange incentive.

[_Q_]

Yeah this thing is beyond dumb.

Let's prop up an already inflated industry just so low income families can afford quartz countertops and stainless steel appliances in their new homes.

[pseudoreality]

Originally Posted by MillerTime GFG

Here’s what’s ridiculous about the new CMHC incentive. Example:
- 100k household income currently could buy for around 458k (quoting a colleague). This new incentive restricts people to 4X their household income, which would mean a max purchase of 400k. This means this incentive actually does not help affordability (or qualifying) whatsoever. It more-so helps people that can already comfortably do so save some cash flow.

This isn’t an affordability incentive, it’s an assistance to cash flow. This is such a strange, strange incentive.

I have a lot of issues with this program, but it being capped at 4x income is not one of them. People are too indebted. The banks keeping throwing debt at people and Canadians eat it up. No one should be borrowing the max the bank will let you get away with. That is why they put in the stress test, because banks weren't being careful enough. Also, are you sure it is a max purchase of 4x income and not a max mortgage of 4x income?

[Calgary14]

I just don't get the logic behind this and it seems to be based on the assumption that house prices always go up.

CMHC needs to clearly answer what happens if/when someone sells and there is a negative equity situation. The fact they haven't addressed this in the initial outline means they are hoping/assuming prices won't go down, or they don't want potential homebuyers to consider that scenario as it means they might decide not to buy. If CMHC has to eat a loss that essentially means the taxpayer is on the hook for it

[bluejays]

Again, the problem with the house situation is the supply being low. This program does nothing to get more homes on the market (either new or existing). So people are holding on to what they have because the demand is so pent up. I don't know all the details of the CMHC deal, but it seems like economics 101 but the focus is on the demand side which is the oddest thing. Doesn't help do much but prop up the price of lower homes. You'd think our politicians would see this.

[Weitz]

Originally Posted by Calgary14

I just don't get the logic behind this and it seems to be based on the assumption that house prices always go up.

Well considering the whole Canadian economy is essentially built on that fact...

[MillerTime GFG]

Originally Posted by pseudoreality

I have a lot of issues with this program, but it being capped at 4x income is not one of them. People are too indebted. The banks keeping throwing debt at people and Canadians eat it up. No one should be borrowing the max the bank will let you get away with. That is why they put in the stress test, because banks weren't being careful enough. Also, are you sure it is a max purchase of 4x income and not a max mortgage of 4x income?

It is 4x mortgage amount. It's fine that you don't necessarily disagree with this, but the Government shouldn't be labeling it as an aid to affordability then really. This doesn't help people afford a house that isn't within their reach, as this is just an incentive that will free up some cash flow for those that can already afford a house.


A 30-year amortization would have been far simpler, and made much more sense. Let's not forget that Canada has one of the lowest mortgage default rates in the world.

As for your point about no one should be spending to their limit and that banks are throwing debt at Canadians and we're eating it up...first off, there are plenty of people that can spend right to their limit and be just fine, because they're disciplined. The GDS/TDS ratios + strict qualifying requirements do a pretty darn good job (plus the stress test now). What should really be addressed by the Gov't is unsecured debt, but that's a completely separate topic. When I went to buy a vehicle in 2017 (first time in a few years), I went in all prepared with my T1 Generals + Notice of Assessments for the past two years, only to find out none of that was needed. They checked my credit, and that was it. "Sign here please". Are you kidding me? Credit cards, lines of credit, etc...all in the same boat. It's household debts that are at an all-time high, not mortgage debt. Not to mention they're far more punitive in terms of interest rates, so this is where people are really getting in trouble.

[gasman]

There has been some talk on here about what happens if someone defaults on a shared equity mortgage, but there is another side that I haven't seen much talk on. I heard Morneau on the radio over the weekend talking about it and he kind of glossed over it with a "we need to sort out the details" but the definition of shared equity is that the homebuyer sells a percentage of their property (including future gains in property value) to the lender in exchange for a reduction in the side of their loan.

So if you do buy a house for $400k and house prices go up, you automatically lose 10% of the profit.

I don't think their idea is being explained very well, and people who will take advantage of this will be all well and good, until they "lose" 10's of thousands of dollars when they sell their house.

its like the IRD penalty, it was in the mortgage documents when you signed, but no one paid attention, and then when you tried to renew early you were hit with $20k in penalties instead of the $3k you were expecting, I predict this will be the same thing.