It Is About To Get Even Harder To Finance

Why? How?

The body that oversees mortgage financing, OSFI, isn’t happy with what is going on and wants to ensure that lenders are following the rules as set out in their guidelines released in the last 2 years called B20 and B21. Those sound like world-war 2 bombers but they are not - they were the framework for mortgage underwriting and what each bank & lender is supposed to do when processing a loan request.

Note I said, “supposed to do”.

Most of us heard about the “student” who bought a $24M mansion in Van-city and took out a $9M+ CIBC mortgage, here on a student visa, right? Well that’s not what the intention of the B20 and B21 rules was, and now it appears that it’s causing OSFI to cast a wider net and look at five major underwriting components:

Income verification - OSFI is concerned too much fraud is going on, and not enough check and balance is happening with income verification. My take: Although I hear of it, I don’t see it. The lenders could certainly do a much better job and standardize the process or ask for CRA authorization, but they never will.

Non-conforming loans - should be limited to 65% of the value of the home when the typical income/credit/down payment rules don’t apply. My take: I see this being pushed to 80% all the time and the credit unions who don’t act under OSFI can still easily qualify at this level.

Debt Service Ratios - our rates are way too low now and it is too easy to get a mortgage. TRUE. For example, someone with a $75,000 income at 2.39% (a good 5 - year fixed rate) can qualify for $475,000 in mortgage lending. If you bump that rate up to the POSTED rate of 4.64%, that number drops to $375,000. My take: They are right. It is far too easy to qualify using the 5 year fixed-rate, but it should not be the 5 year posted rate (220bps higher). A happy medium here is important.

Appraisals - this is a big one. “Lenders should challenge appraisers”. Interesting to read that, but how? How can a bank or lender challenge a certified-appraiser that they sent out and who agreed the value was in line with the market? In a dizzying market like ours, who holds the power to agree or disagree with the ultimate value? My take: more lenders will utilize independent third-party services to get their appraisers, and expect even in high-ratio mortgages to have appraisals mandatory.

Risk Appetite - The banks and lenders are being asked to see if their lending portfolio is in-line with what the direction of the company is. My take: We already heard Scotiabank wanting to pull back from lending in Toronto and Vancouver and expect more to follow.

As the yardstick is being pushed back continuously, you must know that financing is a key component of your client’s successful path to buying and selling their properties.  No matter which side you’re on:

-if you’re a buying, you have to know and be prepared for Plan B, C and D.

-if you’re a selling, you have to know what your buyer may go through if they are not prepared fully.

Overall, our market is completely insane and irrational now. Houses that sold for $890K 2 years ago are now $1.4M today in some cases (I know, because I see both sides of the transaction). Is it sustainable? Can we hold on? What will happen? Nobody knows. The trick is to navigate the waters now and be prepared for what’s coming.

I’m here to help with all questions you have who may be caught in the cross-fire of these (important) rule changes.

Thanks for reading, Jake

Posted in: News