When my wife and I got our first mortgage in the late 1970’s, it was the easiest thing in the world. We walked into our banker’s office; he asked me a few questions about how much money I paid myself (as a self-employed, house-framing contractor) and, on the spot, approved us.
How times have changed!
When the economy is chugging along at full steam, mortgages are easy because the banks perceive their risk to be low. After all, it won’t be long before the 95% mortgage they placed on a property represents only 80%, or less, of its rapidly appreciating value. That’s what was happening prior to 2008. To make it even easier, amortization terms were as high as 40 years. A longer payoff period means a lower monthly payment, which means you qualify for a bigger mortgage with less income.
Thank you, American bankers, for screwing this up!
You see, a lot of those bankers got greedy and started aggressively promoting mortgages with ever flimsier qualifications (the “sub-prime” mortgages). Many consumers, too trusting of the banks instead of weighing the risks on their own, fell for easy money based on financial schemes that were not sustainable. Canadian banks mostly avoided such nonsense, but also chafed under federal regulations that deterred them from participating in these practices, regulations that also helped to maintain some semblance of “healthy” competition.
When the American house of cards came crashing down, Canadians were mostly protected by the restrictions the banks had chafed under (and our healthier Canadian banks quickly gobbled up many of the small American banks going broke under the weight of their mismanagement.)
But, we were not unaffected. Our economy, too attached to the American one, was also hit hard and, to support the economy, interest rates (controlled by the Bank of Canada) plummeted alongside the American ones. With barely positive rates, it should have been even easier to get a mortgage. Caution flags went up, though, and the government stepped in again. The 40-year mortgage limit was reduced to 30 years, then to 25 for homeowners. The higher monthly payment needed for the shorter amortization period counteracted the effect of the lower interest rate.
OK, does the federal government have to protect us from ourselves? Are we not savvy enough to understand our own limitations? Apparently not! We need a nanny to look after us!
But, I digress.
Nanny decided we were still too vulnerable. Nanny had already regulated that all mortgages with less than 20% down needed to be insured. And who does the insuring? CMHC, controlled by nanny. (OK, they’re not the only mortgage insurance company, just the biggest one, by far, and the one the banks mostly rely on).
Next step: no more insuring of investment mortgages, only homeowner mortgages (meaning all investment mortgages needed 20%, or more, down). This was intended to prevent foreclosures of investment properties, but it also made it more difficult for investors to provide housing at affordable prices for renters. And to spend money on needed repairs. It pushed more consumers back toward buying.
Except–the nanny threw up another barrier. Still worried about low interest rates making it too easy for people to get themselves into trouble, plus, facing a funding ceiling, master CMHC toughened the criteria for approving mortgages. How? By selecting only the best credit risks for approval. It became somewhat arbitrary but the trend was to gradually increase the credit score needed for approval. Whereas you could get a 95% mortgage approved with a credit score around 650 a few years ago, even 700 is no longer safe; they’re looking at closer to 750 and then still looking for any possible reason to turn you down. 5% down is almost a historic relic. For a 90% mortgage, 600 was good enough a couple of years ago; now we’re aiming for 700.
There’s a lot of “good cop, bad cop” going on out there, too, it seems to me. Your bank wants to come across as the good guy, so they’re telling you they can approve you for a mortgage. Then, a few days or weeks later they come back and have to renege because, sadly (insert tear here), CMHC turned the deal down. I get these stories regularly. I think sometimes the banks are, knowingly, misleading people.
What does it all mean? It means more frustrated consumers who can’t qualify for mortgages under these policies. It means more frustrated renters who need something like a rent-to-own program, to get into home ownership. And it means consumers need to get more educated about the mortgage process, and about financial matters, generally (more on that another time).
As a rent to own professional, it means that our minimum qualification criteria also need to rise. We don’t want to set anyone up for failure at the end, so we have to qualify you more cautiously at the start. And it means keeping on top of the changes that CMHC and its master, our finance minister, are continually making.
And passing that information along.
At least, that’s how I see it . . .
Quote of the Week:
A moment’s insight is sometimes worth a life’s experience. – Oliver Wendell Holmes, Sr.