Clamping down on mortgages
The dynamic between the Canada Mortgage and Housing Corporation and the real estate sector is occasionally reminiscent of a Wile E. Coyote and Roadrunner cartoon. Every time the Crown corporation plots to slow down the housing sector, it manages to elude the scheme and, with a triumphant “beep beep,” bolt down the road at a furious pace.
Through CMHC – rather than Wile E. Coyote’s much-favoured Acme Corporation - Ottawa has used several tools designed to slow Canada’s residential real estate market. It put a 25-year limit on new mortgages, it implemented the minimum requirement of a five per cent down payment, it publicly preached caution.
Those measures may have been briefly effective, but after each lull the momentum soon gathered and house prices and demand invariably took off again. Last month, for example, house sales in Toronto were up 16 per cent from a year ago and up 40 per cent in Vancouver.
But all that could change soon. As an added bonus, any thought of privatizing the Crown corporation could also be squelched for the foreseeable future.
Instead of targeting homebuyers, the CMHC (which insures mortgages worth $562.6-billion and is fast approaching its $600-billion limit) is now taking aim at the lenders who are responsible for financing the real estate boom that has caused the federal government and the central bank chronic concern.
In a nutshell, it’s curtailing the number of mortgages that it will insure against default. Homebuyers with less than a 20 per cent deposit are required to carry that insurance, which protects lenders by shifting the burden of mortgage risk to taxpayers.
To that end, the CMHC recently notified banks, credit unions and other mortgage providers that they will each be restricted to a maximum of $350-million of new mortgage guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program.
Lenders have brought this cap on themselves: For 2013, the CMHC has the authority to guarantee loans of up to $85 billion under the program. By the end of July, however, strong consumer demand and aggressive lending meant that $66 billion had already been committed. (That compares to $76-billion in mortgage loans during all of 2012.)
Going forward, that cap that will make it harder - and more expensive - for financial institutions to access the funds they lend as mortgages. It’s expected the new rules could raise mortgage rates by 25 to 60 basis points.
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