Tag Archives: CMHC

The Mortgage Stress Test Troubles Just Got Worse

CMHC reported that the 2019 national apartment vacancy rate was down to 2.2%. Yes, because the stress test does not allow younger people without a big income to buy even an entry level condos or townhouses. Yes, it’s fine to pay triple the amount in rent – but heavens forbid they want to become home owners. Another way the Federal Government, through CMHC has absolutely messed up the free market system. But it does reward landlords with huge rent increases since their renters don’t have the option of purchasing and landlords don’t use a stress-test.

To make things worse, CMHC tightened up the rules even more to put the brakes on home sales in the middle of a no home sales market. Your total payments from credit cards to your car, to the new mortgage, taxes and utilities now can’t exceed 35% of your gross income. That’s down from 39%. So someone making $50,000 just had their ability to get a mortgage reduced by $167 a month. Plus you now need a credit score of 680 or higher – up from 600 and you can no longer borrow the minimum 5% down payment.

The person making $50,000 in our example can have 35% maximum going towards all bills. That’s $1,458 a month. That’s an easy calculation before ever even thinking about becoming a home owner. That has to include taxes (let’s just use $300 a month) and utilities (most lenders us a flat $100). Deduct that $400 from the maximum allowed leaves this person $1,058 for the actual mortgage.

Since it’s most likely to be a condo or townhouse, the condo fees have to be in that 35% maximum debt, too. You’d be hard pressed to find a condo fee under $250. OK, so condo fees, utilities and taxes off the top brings it down to $800 left. Next hurdle is that you need to qualify for a mortgage rate 2% higher than actual. So rough numbers is that you need to do the calculations on about a 5% mortgage rate even though you’ll be under 3% in your actual payment. And that’s a max of $135,000. And don’t forget that this is 35% of all debt. So this math is all assuming the person has no car payments, no student loans and zero balance on their credit card. If it’s someone with a $300 student loan, it’d be a maximum mortgage under $90,000. Or wait until the student loan is paid off in 20-years before every being able to buy a home.

Tell me what you can buy for $135,000 in the Okanagan – or anywhere else for that matter. And tell me what 20 or 30 something is paying under $800 rent for anything other than a garage.

Sure the stress test has a purpose. But that should be to slow down the one million dollar buyers with a 95% mortgage. Instead, it’s the law of unintended consequences of hitting the entry level buyers.

Housing Correction Forecasts

We keep asking and wondering if there’s a housing correction coming in Canada – or at least in the hot-market cities. Well, good luck finding a definitive answer. A heads up first: This is exactly like investing. Ignore the forecasts and news stories and just carry on with your life. If you’re not selling in the next while – who really cares? It should be entertainment news more than useful news to 90% of home owners!

The Globe and Mail recently published the forecast and predictions of a whole bunch of experts and companies that ought to be the experts. The short answer? It might go down a ton…or it might go up. You pick who you want to believe. If you’re a pessimist, there’s a forecast you’ll love. If you’re an optimist, there’s a forecast to fit your mindset…

Deutsche Bank: 60% drop coming…their analyst used prices compared to incomes and prices compared to rents.

Fitch Ratings: 26% drop…their emphasis was on factors that drive demand for homes.

Bank of Canada: 20% drop..factoring in the 10-year bond rate as measuring stick for mortgage rates and our per-capita after-tax income.

International Monetary Fund: 11% drop…they’re new at Canadian estimating and include population growth, income and employment growth as major factors.

TD Bank: 11% drop…TD economists consider median family income, interest rates and employment levels as their key factors.

CMHC: 3% drop…They use four different models and the most complex calculations that would take half an hour to explain. They believe the housing market is anywhere from 16% overvalued to 13% undervalued, making it an average estate of a 3% drop.

Or you could pick one of the other models if you prefer to hear that prices will go up 13%.

Housing economist Will Dunning: 9% increase in values…As with CMHC, it’s complex to explain the modeling used. However, it’s the connection between rates and return on investment. Dunning believes we haven’t fully taken advantage of low rates, causing him to forecast a 9% increase this year and 25% over the next few years.

Pick the forecast you like, and good luck to you. But the question is what difference does it make? If you’re an investor, it might. But you and I need to live somewhere. We probably like our home, we’ve paid a ton of payments into it, may have kids in the school system and really aren’t going to move.

These forecasts help investors and lenders to tighten up, loosen up mortgage lending or other factors. But if you and I start to act on one of these forecasts, we’d be in big trouble.


Besides, are these forecasts for basically Calgary, Toronto and Vancouver? Would they apply to a condo in Penticton? Would they apply to an average but expensive home in Rutland or the outskirts of Edmonton? Is your home average and you’ll  be impacted? Is yours one of the top 10 most expensive in town?


Who knows who’ll get impacted or what economic earthquake or growth is coming…they’re guestimates and I choose not to let that impact my life, my home or my thinking, spending and actions.


Maybe we should revisit these forecasts next year. But, by then, there’ll be a lot of new ones to wonder about.

Eight Financial Legislation Changes That Would Really Help Us

Recently NDP leader Jack Layton held a press conference here in Edmonton to put the spotlight on credit card issuer. Mr. Layton comments focused on the high merchant fees and on credit card interest rates.

He’s half right, and half off the mark. The merchant fees that retailers have to pay in order to accept credit cards average around two percent. In addition, there are also a ton of other fees which add up to another one or two percent. They’re not optional, because it’s impossible for a retailer not to accept credit cards, they keep rising, and they are certainly built into the retail price of what you and I pay.

The issue of credit card rates is another matter. I’m always hopeful that Mr. Layton will use the massive media attention he can draw in a positive and constructive way. But, once again, I was disappointed. Two years ago, Mr. Layton called for the elimination, or drastic reduction of ATM fees. Sorry, but an ATM fee is a “lazy fee,” as we discussed at the time. Nobody has to pay them, if they just go another two or three blocks to their own bank machine where there’s never a charge.

Mr. Layton wants the government to force financial institutions to have at least one credit card at prime plus 5%. Sorry, but with write offs and other costs, that can’t happen, and won’t happen. But then, for anyone carrying a balance, there are cards with 11% rates out there. If you are going to carry a balance, it’s a quick fix to change from a 20% card to the low-rate card. Forget the perks and points. Most are never claimed in the first place, the worst of which are airline miles. where Consumer Report found that over 75% are never redeemed.

There isn’t a law that says you HAVE to use your credit card. It’s your choice and it’s one of the most expensive ways to finance things.

If you carry a credit card balance – stop using it until it’s paid off! Broke people can’t keep spending! We’re at 150% debt to net income – and it’s getting worse, and we’re now more broke, and saving less, than Americans! No law Mr. Layton may want to pass will stop broke people from continuing to dig their financial hole deeper and deeper.

Needless to say, I would do anything to get one-one hundredth of the media attention Mr. Layton can garner to make a difference in financial education and to actually help families. Mr. Layton missed a great opportunity to shine the spotlight on financial issues that matter and that can, and should, be addressed.

How about some legislation that Universities and Colleges can’t sell their student lists to credit card issuers? It’s our educational institutions selling out their students for a kick-back.

How about that you actually need a job to get a credit card, and preventing them from being issued to students until age 21 and with proof of an actual income?

How about changing the giant rip off of mortgage insurance with CMHC? CMHC has $8 billion in net assets and made almost a billion dollars in 2009. Yet we have to pay the insurance on less than 20% down payments. In the U.S. it’s monthly premiums until you do reach the 20% equity. At that point, the premium charge stops.
Here in Canada, it’s entirely front loaded, and adds $14,000 to $18,000 in costs to the average mortgage.
How about re-starting Bill C27 that died, making it a criminal offence to steal someone’s identity, with up to five years prison?

How about a credit freeze law that allows individuals to totally block their credit report, making it impossible to be the victim of identity theft? Because it’s the ONLY way to accomplish that.

How about legislation that forces financial institutions to advice customers when their transaction will trigger an overdraft with huge fees? This opt-in rule would be a no-brainer in having an ATM screen display that you are about to go into overdraft with this withdrawal.

Better yet, how about matching the U.S. legislation that requires customer consent before every allowing an overdraft? That way, people can’t be trapped into huge overdrafts they never consented to.

And back on credit cards, how about restricting the $30 or $40 over-limit fees to a percentage of the balance, or requiring specific customer permission before over-limiting the account in the first place? Right now, a $2 coffee can trigger a $30 overdraft.

How about championing a consumer bill of rights, including the right or ability to speak to a human being at the credit bureau with inquiries, or concerns about their credit file. Because, right now, one-third of files have errors serious enough to prevent obtaining credit.

Those are eight reasonable and reasonably simply issues that can be passed through the House of Commons and become legislation. Unfortunately, they are certainly not as sexy as talking about ATM fees, or mandated low-interest credit cards. But then, is it about cranking people up, or wanting to help and make a difference?

Making the Connection: Vegas and Yesterday’s New Mortgage Rules

Yesterday, the Finance Minister announced a number of new regulations designed to tighten the lending standards for mortgages insured through CMHC. The main three are:

-Refinancing is now capped to 90% of appraised value, down from 95%
-Mortgages on investment properties now require a minimum of 20% down payment
-First time home buyers must have enough documented income to qualify for the payment equivalent of a five year fixed rate mortgage. The buyer may choose a variable rate option at a lower payment, but the income has to be there to be able to make higher payments in anticipation of rate increases.

In practical terms, on a $200,000 mortgage, the buyer needs to qualify for a $1065 payment of a five year term, even if they choose a variable rate mortgage that would actually be $923 a month. (Currently at 4.09% vs. 2.75%). That translates to an additional $345 a month of income, or reducing other monthly payments by $138 a month.

That brings me to my trip to Vegas last week. Vegas is one of the ground zero cities in the U.S. mortgage meltdown. The city that never sleeps had a decade of building house after house, and selling it to investors with no money down, gambling they’d be able to flip it at a higher price to the next buyer – kind of a legal pyramid scheme. And homeowners saw the value of their homes double and triple over a decade and, on average, cashed out their equity every two and a half years, for an average of $30,000 each time.

Now that the music has stopped and reality has set in, the majority of residents owe way more on their homes than the value. You won’t see the devastation on the strip, but drive a few miles north on I-95, and you see foreclosures and bank owned sales, after foreclosure and empty homes.

An even bigger problem are the upscale, luxury condominium projects that just came on line in the last year. They’re 20-30 stories, often, like the Panorama complex, multiple towers – and pretty much empty. At the end of the strip is a twin tower called One – Las Vegas. I saw four cars and a security guard. I’m guessing one entire tower of 20 some stories is empty.

Visitors to Vegas are down 10%, and I’m surprised it’s not way higher. The casinos, hotels, and malls are noticeably empty. Gambling revenue is also way down and the hotel occupancy rates are the lowest since 1984. The Tropicana is in bankruptcy, and even Hooters Casino is in default on their loans.

Unemployment is over 13%, and expected to peak at about 14.5%. Vegas has the greatest fall in personal incomes, highest national foreclosure rate, and the largest percentage of homeowners who owe more than their home is worth.

THAT is the end result of a real estate bubble and insane speculation of buying homes people couldn’t afford, with teaser, variable rate mortgages and no down payments. It works for a while, but it’ll always come to an end. THAT is why the Finance Minister preemptively amended mortgage rules before we potentially get to that point.

Every kid puts their hand on a hot stove once. Yet us adults keep making stupid financial gambles over and over, somehow thinking the next time will be different. Yes, it’s our money, but when our gambling starts to affect the overall economy, it is reasonable for the government to set some basic ground rules.

My rules, and advice for anyone who will listen, go way beyond that:

-Broke people shouldn’t buy or own homes.
-Never buy an investment property without at least 50% down. Because when the roof needs to be fixed or there’s no tenant for two months – you’ll lose it all.
-First time home buyers need to be debt free and have 20% down to avoid our outrageously expensive mortgage insurance in the first place. It’ll make it a dream home, not a mortgage and debt nightmare.

What The Heck Happened On Wall Street This Week?

In the months to come it’s likely this past Monday will be called Black Monday on Wall Street. Where do I start with the big three stories of the day.

But first things first: I wish I had five more minutes to give you a brief history of how we got here, because it affects us Canadians in huge numbers of ways.

Suffice it to say that in Canada, banks hold mortgages on their own books and keep them in-house. In the U.S. they’re packaged and sold in blocks called Collateralized Debt Obligations, or CDOs. They’re all pieces of thousands of mortgages, good stuff, bad loans, subprime and kinky ones all put through a blender and packed nice and neat. Everybody wanted them and nobody could get enough on their books for years.

The huge investment firms were making billions in fees gathering them, packaging them and re-selling these CDOs. It turns out that they started to fall in love with the product they were selling. First, they put a ton into their own accounts, because it was a great return. When things slowly started going sour and they didn’t want to admit it and to keep making the market think everything was just fine, they got stuck with billons more they couldn’t sell.

Now back to Monday: First was the huge and well established investment firm Lehman Brothers filing for bankruptcy. They were done in, or finally dragged under, by over $60 billion of bad mortgage loans on their portfolio. And, gee – their CEO got $22 million in pay just this past year. Nice money for guiding his company into bankruptcy…

Then came the announced sale of Merrill Lynch to Bank of America. Same story in a way, since Bank of America is buying the firm in an all-stock deal. That’s kind of like me buying your house for no cash, but only paying off your credit card bills.

Lastly was the insurance giant AIG filing for re-organization. It’s not that the insurance business is bad. It’s just that AIG invested their clients’ premiums in mortgage loan portfolios, instead of GICs, because they were getting a better return. Lesson number 780 for all of us: If you want a higher return you have to take a higher risk!

And a month ago, we were told that the worst was behind us. Yea, right. Banks and investment firms are the oxygen of the economy and this isn’t helping.

Added to the Monday list is the government takeover of Fannie Mae and Freddie Mac last week who hold over $5 TRILLION of mortgage loans. There isn’t really a Canadian equivalent unless you kind of think of CMHC holding half of all Canadian mortgages on their books!

Until home values stabilize we can keep using the quote from Lily Tomlin: Things are going to get a lot worse before they get worse.