Discontinuation of CMHC Second Home and CMHC Self-Employed Without Traditional Third Party Validation of Income Products
Wow... that title sure is a mouthful.
Today, the Canadian Mortgage and Housing Corporation released that effective May 30th 2014, they will discontinue a couple of their programs.
CMHC Second Home Product
CMHC Self-Employed Without Traditional Third Party Validation of Income
Here are some of my initial thoughts on the changes, I am sure we will share more information in the coming weeks as the news settles in.
This seems like a political move to attempt to satisfy people who are hounding the CMHC over risk. The proof is in the stats - if these products combined only accounted for less than 3% of CMHC's portfolio, then where is the risk?
Decisions like this amount to unnecessary limiting of CMHC's underwriting flexibility for situations that make sense. In Canada' we're moving towards underwriting practices that limit lender and insurer flexibility to a rigid set of strict guidelines that make it difficult for these parties to make reasonable exceptions to policy based on experience or other more subjective risk mitigating factors.
Second Home Program:
Under this policy, a homeowner at 35% loan-to-value (i.e. owes $35k for every $100k in property value) but in a CMHC insured mortgage - presumably because they never refinanced - could be prevented from buying a CMHC insured home for their kids to live in while attending university. First the parents would have to refinance conventionally and remove CMHC, then they could purchase. This is an inefficient and expensive way to accomplish the same thing.
This has the potential to substantially hinder first-time buyers whose parents have a CMHC insured mortgage if they're relying on those parents to co-sign.
This has the potential to complicate and hinder labour mobility because someone being transferred across the country cannot own more than one CMHC insured home. If sufficient equity is in place the borrower could be required to refinance the existing property conventionally to eliminate CMHC.
The changes to the self-employed program are part of an ongoing trend to further differentiate "A" mortgage business from "B" and "C" mortgage business... and increase the cost to the B and C borrowers according to risk, which I support. If you're self-employed and not reporting enough income, the Government wants to change that and have you pay more tax. If you're not going to do that, you're going to pay higher interest rates through B lenders. Congratulations to Home Trust, Optimum, and Equitable Bank, among others, on today's announcement.
A couple more points to note: Accountants need to get on top of these rule changes and understand the implications for their business owner clients. While self employed borrowers need to get ready to put at least 15% down... or if Genworth and Canada Guaranty can fill the gap it may bring increased market share to them.
Here are a couple of the information sheets provided by CMHC.
We understand that rule changes can be confusing, If you have any questions about these changes or anything else for that matter, please feel free to contact us anytime!