40-year mortgages off the table
The federal government has launched initiatives aimed at preventing Canada's housing market from becoming a United States-style bubble in which reckless mortgage financing practices led to a collapse of that country's inflated housing market.
Canada Mortgage and Housing Corp. (CMHC) and the Department of Finance recently announced they are taking action to increase the availability of mortgage funds and to make qualification criteria more restrictive than what it has been in the past couple of years.
The new initiative is an expanded Canada Mortgage Bond (CMB) program, administered by CMHC, with a 10-year maturity to attract new individual and corporate investors who are seeking assets beyond the current five-year term.
"In the past year, when mortgage lending institutions across many countries have faced liquidity and funding challenges, Canada's CMB program has provided cost-effective funding to Canadian mortgage lenders and a high-quality investment for investors," CMHC president Karen Kinsley said in a news release.
"Through this enhancement, the CMB program will continue to provide Canadians with access to affordable mortgage financing."
The CMB expansion announcement is in addition to the record $12.5-billion CMB issue that occurred in June 2008, which provided funding for 25 financial institutions and some 64,000 Canadian mortgages..
CMHC, which fully guarantees CMBs, introduced the program in 2001 to benefit homebuyers and the housing industry by improving access to lower-cost mortgages and enhancing the availability of readily accessible cash in Canada's mortgage market.
The Finance Department recently announced new rules for government-guaranteed mortgages that are aimed at protecting and strengthening the country's housing market.
These measures include:
* Reducing the maximum amortization period for new government- backed mortgages to 35 years from 40 years. The government introduced the 40-year period in 2006 as a "financial innovation" to encourage more home buying.
* Requiring a minimum down payment of five per cent for new government-backed mortgages.
The government previously had allowed loan-to-value ratio loans of up to 100 per cent as another "innovation."
* Establishing a consistent credit score requirement. "Canadian lenders have not originated many government-backed mortgages for borrowers with low credit scores," a Finance Department background paper says.
"To ensure this practice continues, the new framework will establish a credit score floor of 620. There will also be a limited "basket" to provide for exceptions to this rule, recognizing that there are some borrowers with credit scores below 620 that otherwise represent low credit risk."
* Introducing new loan documentation standards to ensure that there is evidence of reasonableness of the property value and of the borrower's sources and level of income.
The mortgage guarantee framework is to take effect on Oct. 15, 2008. This will allow existing mortgage pre-approvals with the common 90-day duration to be used or expire.
The move marks a "reasonable and measured approach" by the government to ensure Canada's housing market remains strong, the department said.
Later, in a speech, federal Finance Minister Jim Flaherty noted the fragility of the U.S. housing market and his government's desire to prevent Canada's real estate market from going down that road.
"The government has concerns about 40-year amortizations and very small down payments in residential housing," Flaherty told the Calgary Chamber of Commerce. "We, of course, want to avoid anything like (what) the Americans went through in their housing sector."
Flaherty said the adjustments to the loan-qualifying criteria are "a measured and responsible" approach to residential housing financing in Canada.
"They are modest changes but we do want to encourage Canadians to build up equity in their homes."
John Hrynkow of Edmonton, president of the Canadian Home Builders' Association, applauded the federal initiatives. He said the paring back of overly liberal financing terms - 40-year amortizations and less-than-thorough documentation - will enhance the market's financial soundness.
"You shouldn't be monkeying around with the actual free flow of the market," Hrynkow told Business Edge. "You're creating a false economy. That's exactly what transpired in the U.S."
Hrynkow said the expanded CMB program will also enhance the market's underlying stability. "That assures an availability of funds," he said. "It creates competition in the marketplace for interest rates."
Canada's government and financial leaders do Canadians a service by avoiding the excesses of the U.S.'s latter-day financial system, in which the traditional business cycle appears to have been replaced by a bubble cycle.
In a February 2008 cover story, Harper's Magazine noted that the U.S. economy seems to need to create a new bubble each time it must extricate itself from the consequences of the previous one, which begs the question: What's next?
Last month, the Washington, D.C.-based International Monetary Fund (IMF) said expected losses from U.S. sub-prime mortgages remain high and loan deterioration is becoming more widespread.
More ominously, the Pasadena, Calif.-based IndyMac Federal Bank collapsed recently under the weight of its deteriorating mortgage assets, becoming the third-largest bank failure in U.S. history.
And now the country's housing government-sponsored enterprises (GSEs) - Fannie Mae and Freddie Mac - are developing huge fault lines.
This is not good news, because out of the $5 trillion in debt- and mortgage-backed securities guarantees issued by these GSEs, more than $3 trillion is held by domestic financial institutions, including commercial banks, savings and loans, and credit unions. More than $1.5 trillion is held by institutions and central banks overseas.
In a July 28 Global Market Update, the IMF wrote: "At the moment, a bottom for the U.S. housing market is not visible."
In Canada, the market's prospects are rosier. In its Housing Market Outlook for the first quarter of 2008, CMHC says Multiple Listing Service average prices are expected to increase by 5.2 per cent nationally this year and a further 3.8 per cent in 2009.
New housing starts, meanwhile, are expected to decline by 7.3 per cent to 211,700 units this year, the report says. "Despite this fall-off, housing starts will have been above the 200,000 level seven straight years," it adds.
In a February 2008 assessment of Canada's financial system, the IMF says Canada has maintained prudent lending practices and kept the volume of sub-prime loans at a level of less than three per cent of outstanding mortgages.
"The Canadian financial sector is among the world's most highly developed," the IMF says. "The five large banking groups that form the core of the system are conservatively managed and highly profitable."
(By Brock Ketcham - For Business Edge, Published: 09/05/2008 - Vol. 8, No. 18. Brock Ketcham is an Edmonton-based writer who specializes in consumer and public policy issues.)
