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Here’s a bit of a happy news piece, with a slice of reality thrown in for good measure.
Two weeks ago, CMHC changed their underwriting guidelines, making it tougher to qualify for high-ratio mortgages. Historically, whenever CMHC made policy changes, the other two insurers, Genworth and Canada Guaranty, follow suit, and change their guidelines too.
In a surprise announcement on the following Monday, both Genworth and Canada Guaranty stated they wouldn’t be changing underwriting guidelines.
I applaud the decision from Genworth and Canada Guaranty. Now, even though I was wrong on my initial prediction of these two insurers following suit, I’m happy the result is still good news. First time homebuyers with less than 20% down can breathe a sigh of relief, as they don’t have to rush to purchase something prior to July 1st.
After hearing the announcements, I combed through the news trying to find some real analysis into their decision, to no avail. It’s quite baffling to me that such impactful announcements by the two insurers didn’t generate any analysis from our news outlets. Needless to say, as a local Victoria mortgage broker, I’m here to provide some insight.
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In Genworth and Canada Guaranty’s statements, both emphasize that their current underwriting standards are strict enough and do not warrant a change. Both also emphasize that the borrower’s debt service ratios are not strong predictors of borrower defaults, especially given previous changes to qualifying aspects, the biggest previous change being the implementation of the stress test. I would agree with them here, the mortgage qualifying rules are already strong enough to weed out most people who actually cannot afford to purchase a home.
It’s almost as though this was planned by all three organizations in tandem. Why? Let’s consider their frameworks first. Genworth Financial is a publicly traded company responsible to it’s shareholders, and Canada Guaranty is a privately held company owned by the Ontario Teachers Pension Fund. Both organizations are driven by profit and loss. On the other hand, CMHC is a crown corporation, owned by all of us, the taxpayers in this country. So why is this a win win? CMHC and the Bank of Canada want to limit taxpayer exposure to a downturn in the real estate market during Covid-19, and push that default exposure into the hands of property owners and stakeholders directly. Banks, Monoline lenders, REITs (real estate investment trusts), MICs (Mortgage Investment Corporations), private lenders, commercial property owners, and of course, homeowners, all fall in this category. Other than the banks, there are no bigger investors in real estate than CMHC, Genworth, and Canada Guaranty. By tightening their regulations, CMHC could effectively be pushing more default risk away from the Canadian taxpayer and into the hands of the real estate stakeholders.
On the other hand, Genworth and Canada Guaranty probably saw this as huge money making opportunity, while still limiting their exposure to any massive downturn. By not decreasing their debt servicing guidelines, they will automatically be the choice of all lenders for applications that are over 35% gross debt servicing. The two insurers will bring in many more qualified applicants who fall in this bubble – all of which still have to meet strict income and downpayment requirements. They didn’t even have to loosen any policy to bring in more good business, they just needed to wait for an announcement like this from CMHC, and simply hold their course. Even though they claim their underwriting guidelines are strict enough as is, they know full well that this move will bring in a massive amount of new, and profitable, business.
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While Genworth and Canada Guaranty will take advantage of a greater influx of business, they will also benefit from the fact that they can be “choosier” when approving borderline applications that are within that 35% to 39% GDS bubble. They will undoubtedly only approve extremely strong applications here, and decline others that they may have approved previously. They may become more strict on income guidelines such as the length people are at their jobs before applying, consistency of income in previous years, or applicants who have flimsier sources of income, such as casual or contract work.
Essentially, we can only expect very strong applications to be approved when the debt servicing ratios and credit scores fall within this bubble. Also, anyone coming in with any credit score less than 680 better have extremely strong income and downpayment, or surely, those applicants will be declined. Remember, while the official guidelines for credit scores remain the same at Genworth and Canada Guaranty (minimum 600), they are within their right to decline applications they feel are weak. When we receive such a decline from the insurer or lender, they all have the similar and annoying statement of “we don’t have the appetite for this deal”. While lenders feel that this sort of terminology might lighten the decline, I find it patronizing and rude. Nonetheless, the insurers and lenders are within their rights to approve or decline applications at their will.
It’s important to remember that these changes are only affecting those who are purchasing with less than 20% downpayment. Another question that remains is if the banks will adopt this policy change for applications with 20% or more downpayment, and refinances. I don’t think the banks will follow suit at this time on their conventional lending, as 20% equity leaves the banks in a good security position, and current guidelines on conventional mortgages are already quite strict. The banks are still recording high profits, so tightening rules on conventional loans would negatively affect their bottom lines.
Surely, I’ll be writing another article after July 1st, reflecting my company’s experience with the new change from CMHC, reporting on how underwriting is changing. I might be wrong in my current predictions, I might be right. One thing we do know is that change is unpredictable and inevitable. Stay tuned.
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