Tag Archives: mortgage loans

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.

Credit Crunch? What Credit Crunch? Where?

Whether it’s in the U.S. or here in Canada, I keep hearing about that “credit crunch.”

I understand it, but I can’t personally find it, and you won’t, either. Not as an individual who has decent credit, with a credit score above 700 and the income to justify making the payment.

In fact, all the talk in the U.S. recently was that the lowering of interest rates to near zero was fueling a huge boom in re-mortgaging. Well, those two stories of a credit crunch and all that refinancing don’t jive. And if I had the resources, I’d gladly put up a reward for anyone who can document being turned down because of a credit crunch. It won’t happen.
Find me a lender who’s got the sign out: Not lending today.

I tried to find it myself. I applied for three car loans and three lines of credit. No, I wasn’t getting them – neither you, nor me need more debt. But I was approved every single time! I’m pretty typical middle class and have a credit score over 720. All the approvals were a no-brainer and took less than five minutes each time.

Challenges for business credit issues are different and do exist. But you and I don’t borrow 50 million or a half a billion dollars. It’s why the government is getting the Export Development, Farm Credit and Business Development corporations involved, and helping them.

Lots of debt also gets sold as asset backed securities. That’s the balloon that blew up in the US housing market. It’s about a $50 billion market in Canada and that’s definitely slowed down. No investors really want to own pieces of these securities right now.

As a result, lenders have to keep their loans or credit card balances on their own books, instead of re-selling them. That is the reason rates haven’t moved down much for fixed mortgages and why credit cards are actually going up. It’s an issue of supply and demand.

If we call it business credit crunch, I’m OK with that. But for you and me – for us individuals, there’s isn’t a crunch, shortfall or lack of money. There’s just a new reality that we need good credit and the money to pay the payment. If lending based on good credit and income hadn’t been temporarily abandoned for a few years we wouldn’t have 90% of the mess we do now!

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.