As Canadian personal and mortgage borrowing continues to climb, international watchdogs have called on the government to better assess the risk. The high debt load now poses a risk to government coffers. How?
Mortgage lenders in Canada are required to have default insurance on any mortgage with less than a 20% down payment. Most of that insurance is issued by the Canada Mortgage and Housing Corp., a quasi-government corporation created in 1946 to encourage home ownership. The Canadian government guarantees 100% of CMHC’s obligations. At the end of September, CMHC’s outstanding mortgage principal stood at 541 billion Canadian dollars. That’s more than twice the federal government’s annual budget.
The federal government, which ultimately must cover the Crown corporation’s mortgage guarantees, has imposed a $600-billion cap on how much liability the CMHC can take on.
In turn, to ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process for lenders is being established. The federal housing agency has also served notice to banks and other lenders that it is nearing the limit of $600 billion on mortgage insurance it could offer them.
Will the federal government raise the cap limit for CMHC in the near future? Ottawa increased that from $450 billion to $600 billion in 2008.
Not raising the limit could lead to stricter lending conditions and a cooling of the housing market. TD Bank economist Sonya Gulati said.”It may serve to tighten the housing market,”
Based on stress testing, the government says its contingent liability stemming from CHMC is a modest C$1.47 billion as of last March.
Ottawa has been tightening mortgage lending rules in recent years in the effort to limit the dangers of a crisis in the real estate market in Canada.
Last year, the federal government reduced the maximum amortization period for new government-backed insured high-ratio mortgages to 30 years from 35 years and cut the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent.
The government has also withdrawn insurance backing on non-amortizing home equity lines of credit.
First Line is no longer accepting new applications from so-called “stated-income” home buyers. First Line also set a $1 million cap on what it will lend for a house purchase. First Line is one of the biggest mortgage lender in Canada and often a lifeline for self-employed and new immigrants. It seems that it is slowly backing out of the mortgage business for about a year now.
If other banks and mortgage lenders follow suit, it could become difficult for self-employed, new immigrants and higher-risk borrowers to get mortgages.
No comments yet.