Real estate tightening

Real estate tightening



Fearing a sharp drop in prices and an increase in foreclosures, CMHC has again tightened the criteria for underwriting its mortgage insurance. It could have been worse !

Announced on June 4 but effective July 1, the criteria for underwriting a mortgage insured by the Canada Mortgage and Housing Corporation are subject to further tightening. As a result, the minimum credit score for mortgage insurance goes from 600 to 680 points. Gross Debt Service (ABD) and Total Debt Service (ATD) ratios will be limited to its standard requirements of 35 and 42 respectively, up from previously 39/44. And non-traditional sources of down payment that increase debt will no longer be accepted for loan insurance purposes.

It could have been worse. The president of the federal Crown corporation, Evan Siddall, went so far as to mention in mid-May an increase in the initial down payment from 5 to 10% on the purchase of a property in order to constitute a cushion to avoid selling a property at a loss. He then referred to projections from his organization anticipating a drop of 9% to 18% in the average price of houses over the next year. And he was using data from the Canadian Bankers Association to argue that 12% of mortgage borrowers have already requested a deferral, with a figure expected to rise to 20% by September. He fears that many of these postponements could turn into foreclosures. He fears that a fifth of all mortgages could be in arrears somewhere this fall if the economy does not recover sufficiently.

Limited scope

However, the scope of this decision is limited. CMHC has roughly 50% of the Canadian insured mortgage market. In the private segment, Genworth MI Canada responded by stating that it "did not intend to change its underwriting policy, with respect to debt service ratio limits, minimum credit score and down payment requirements ”.

In addition, it should be remembered that the exercise of assessing the credit of the borrower has its share of subjectivity. The lender will also want to take into account various risk factors, including job stability, the amount of income in the household, other assets and any other circumstances that may affect the borrower's ability to provide the service. debt.

In an analysis released last week, Morningstar DBRS calculated that in the first quarter of 2020, only 10.1% of borrowers in CMHC's insured loan portfolio had a credit score below 680 points. For their part, new borrowers in the first quarter were assigned an average score of 756 and only 5.9% below 680.

For debt service ratios, ABD is calculated by taking monthly housing costs (mortgage payment, property taxes, heating, and proportion of maintenance costs, if applicable) divided by gross monthly income. In the first quarter, 12.4% of outstanding insured loans in force were based on a ratio of over 35%. For ATD, which is calculated by taking monthly housing costs and other debt payments divided by monthly gross income, 29.6% of borrowers had a ratio of over 40%.

The rating agency adds that the lowering of the ABD reduces the borrower's purchasing power by 11%, thus prompting him to look for a property of lower value, with the perverse effect of causing a upward pressure on prices in this segment.

There remains the risk of ending up with a negative net worth if the scenario of generalized price declines is confirmed. In the first quarter of 2020, the majority of people using an insured loan had a down payment between 5 and 10%, an average loan-to-value ratio of 92.2% for a net worth of 7.8% . These people are at greater risk. But across the portfolio, all these years of growing property prices translates to an average net worth of 37.9% in the first quarter. What constitutes a cushion for stormy weather.