A year ago this week, the plug was pulled on controversial 40-year mortgages as the federal government tightened mortgage rules.
The Canadian Association of Accredited Mortgage Professionals estimated that 37% of all new Canadian mortgages taken from the one-year period ending in the fall of 2007 were longer than the standard 25-year amortization period. And according to a TD bank representative, about 60% of first-time home buyers were opting for a 40-year mortgage, an indication that there were affordability problems and buyers needed to stretch out the payments to make the purchase.
Last summer, the Finance Minister was among those who had been sounding alarm bells about the dangers of 40-year mortgages, saying the country’s long-term financial health “requires having a nation of savers.” He was worried about the growing tendency of Canadians “to go to longer amortization periods and smaller down payments.”
Canada-wide, as home prices soared, longer-term mortgages became increasingly popular with homebuyers seeking lower monthly payments. The maximum amortization period was extended from 25 years to 40 years in ______ – well, take a look at the chart below and take a guess what year 😉
(It was in 2006)
In making its announcement last summer about the cancellation 0% down/40 year amorts, the federal government once again stressed it was concerned about the “risk of a U.S.-style housing bubble developing in Canada.”
However, the move came too late according to a Chief Economist at BMO Nesbitt Burns. “It’s a bit like closing the barn door after the horse has already run down the road.”
This leads us to CMHC which is the largest provider in Canada of default insurance on mortgages. Its main objective is to provide access to more affordable housing for Canadians.
Buyers with less than a 20% downpayment must buy a policy, which protects lenders against default. The federal government is on the hook financially because it guarantees 100% of the mortgage insurance claims paid by Canada Mortgage and Housing Corp., which is a Crown corporation.
This has contributed to rising house prices.
“One of the main reasons we did not need a bailout [of banks] is because of CMHC, and the ability to provide cheap credit through its facilities.Did CMHC help to improve house prices today? Yes, they did because they gave cheap credit to bank and banks were able to provide credit and low mortgage rates, which I think is the main reason why house prices are rising now.”
CMHC continues to grow, becoming one of the top 5 largest financial institutions in Canada. CMHC projects that its assets will hit $345.3-billion in 2009, in comparison Bank of Montreal had $415-billion in assets as of July 31.
As prices rise and buyers purchase with less than 20% down, CMHC sells more insurance. Add to that the mortgages CMHC purchases from banks to spur the home-loan market, and you can see why it’s growing at such an unprecedented rate. So much in fact, that for the second time since 2008, Ottawa has raised the amount of mortgage insurance CMHC can have outstanding – from $350-billion at the end of 2007, to $450-billion, to now $600-billion.
Critics charge that such growth demands more oversight, pointing to the fact that even though CMHC is now central to the financial system, it is not regulated by the financial industry’s main watchdog, the Office of the Superintendent of Financial Institutions. It’s also a risk for taxpayers, because while CMHC sets aside billions as a cushion against losses, and is very well capitalized, Canadian citizens are ultimately on the hook for losses on its insurance should the housing market falter and those reserves prove too small.
Unfortunately, it’s a sensitive subject for politicians to take up in debate since the program allows more Canadians to purchase homes.
First time buyers weren’t affected for long when the 0% down/40 year amortizations ended in October last year, as interest rates soon dropped to historic lows keeping house prices within reach.
If times ahead become rough, do you think the government will allow the housing market to falter or will they intervene to keep prices from falling and avoid what has happened in the US? How much is in their control to do so?
Sources to Quotes and Statistics in article