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As your mortgage professional I have received some information is important to the Canandian real estate estate market and mortgage market.

Ottawa weighs stricter mortgage rules

Tara Perkins and Boyd Erman

From Thursday’s Globe and Mail Published on Thursday, Feb. 11, 2010 12:01AM EST Last updated on Friday, Feb. 12, 2010 3:04AM EST

Ottawa is considering new rules that would force banks to use tougher criteria to evaluate mortgage borrowers, a move to ensure that consumers aren’t taking on more debt than they can handle when they buy a home.

The key proposal under discussion would see the creation of new conditions the banks would have to follow when determining whether a customer can afford a mortgage, according to sources. Those rules would require banks to consider whether a person who takes out a variable-rate mortgage on a home can continue to make the payments if interest rates were to go up significantly.

Finance Minister Jim Flaherty is under pressure from a number of experts, including executives of major Canadian banks, to take action in the face of surprising strength in the country’s housing market, which shows no signs of letting up. The fear is that many of the borrowers who are buying homes because of unusually low mortgage rates will struggle with their monthly payments when interest rates rise. That could have a dampening effect on the broader economy by prompting consumers to cut back their spending as they direct all their money toward their mortgages.

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Other options that have been suggested include measures that would apply only to people with bad credit scores, or to people who are buying investment properties that they don’t intend to live in. But some banks argue that such rules would be difficult to enforce.

Instead, the idea now gaining traction is creating new rules that would govern how the banks evaluate mortgage borrowers. For example, Ottawa could say that – in order to qualify for federally backed mortgage insurance, which most new mortgages require – a borrower seeking a three-year variable-rate mortgage must be evaluated as if they are applying for a five-year fixed-rate mortgage.

If the three-year variable rate is 3 per cent and the five-year fixed rate is 5.5 per cent, such a rule would help ensure that the customer could lock in their rate and still afford their monthly payments when the Bank of Canada pulls the trigger on interest rate increases.

While some banks are already doing this behind the scenes, there is no standardization. Each bank has its own underwriting criteria and some are tougher than others. For instance, some banks ensure that their customers can afford their monthly mortgage payments if they were 100 basis points or 200 basis points higher. What Ottawa is considering doing is imposing standard minimum rules that banks would use to determine whether customers can service their mortgage debt. It’s not clear how stringent the rules would be, or whether they would only apply to variable-rate mortgages. This would be a much easier move, politically, for Ottawa than increasing down payments – an idea prospective buyers are more likely to react negatively to.

Peter Aceto, the chief executive of ING Direct Canada, said that such a move would be a better solution than raising down payments or decreasing amortizations.

“This is a more surgical approach, as opposed to using a sledgehammer,” he said. “I think this is certainly a step in the right direction.”

ING has recently begun inserting a new line on customers’ mortgage commitment letters that tells them not only what their monthly mortgage payments are, but also what they will be when interest rates rise.

In an interview on the Business News Network yesterday, former Bank of Canada governor David Dodge said that “CMHC should be very careful about the terms and conditions on which they’re giving mortgage insurance.”

A lot of people are probably being induced into the mortgage market who won’t be able to carry their mortgage debts over the long term, he suggested.

Easier MLS access could negate mortgage-rule changes: Report               

OTTAWA — Easier access to the Multiple Listing Service could negate the impact of mortgage-rule changes currently under debate to cool the country’s overheated housing market, Scotia Economics said in a research note Thursday.

“Indeed, the potential is there for home buying conditions to actually become easier over the next one to two years via sharply lower average commission rates that are more in keeping with choices south of the border,” said the note, written by economists Derek Holt and Karen Cordes.

Holt and Cordes argue that the savings from reduced real-estate commissions could be substantial, and could make up a large part of the difference on a down payment if it is changed from a five per cent minimum to a 10 per cent minimum.

For example, a typical five per cent commission paid against the average resale price of $345,000 would result in a commission of $17,250. The same home sold at rates offered by the still-tiny discount-broker segment would result in a commission of $1,500, a difference of $15,750.

“Thus, through the interplay between potential shifts in mortgage rules and the Competition Bureau’s challenge, Ottawa is likely to at worst leave buying incentives on neutral terms, or could even instead drive even more stimulative terms, given a low probability of changes to mortgages rules.

“The Bank of Canada cannot rely on the regulatory apparatus to cool what we think is a house price bubble,” Holt and Cordes warned.

On Wednesday, the Canadian Real Estate Association announced it would ask its members to bow to pressure from the Competition Bureau of Canada to allow easier and possibly cheaper access to the Multiple Listing Service.

While the Conservative government in Ottawa has denied the country is in the midst of a housing bubble, numerous commentators have voiced concern about the possibility, as resale prices reach record levels and new home prices continue to rebound sharply, as reported Thursday by Statistics Canada.

On Wednesday, former Bank of Canada governor David Dodge added his voice to the debate, warning that prices have reached a point where they are almost unsustainable.

And last month, Moody’s rating service joined Bank of Canada governor Mark Carney in warning about rising consumer debt levels, which, the rating agency said, were being driven largely by the housing market. According to Moody’s, the trend could leave Canada in a worse position than the United States in the next few years if it continues.

“We believe the housing market is the principal driver of this expansion,” said the report by Peter Routledge, senior vice-president at the rating agency. “We have the uneasy sense that we have seen this movie before . . . As witnessed in the United States, this movie does not end well.”

Finance Minister Jim Flaherty has raised the possibility of tightening mortgage requirements. Some of the solutions being floated include doubling minimum down payments to 10 per cent or reducing the maximum amortization period to 30 from 35 years.

“There are certain tools available to the government if we choose to use some of them or all of them,” Flaherty said in an interview during the G7 finance minister meeting last weekend in Iqaluit.

“Right now there is no compelling evidence of a housing bubble in Canada.”

If you all have any questions on this matter feel free to call me any time or email me.

Jim Amitofski, BROKER,AMP

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