Mort­gage process tight­en­ing.

The McLeod River Post - - Front Page - Ian McInnes

In­ter­est rates have been low for years now. I can never re­mem­ber a time when they’ve been so low. The trou­ble is that some peo­ple can­not re­mem­ber when they were high ei­ther.

I re­call work­ing in con­struc­tion as a scaf­fold­ing sub-con­trac­tor on a large hous­ing de­vel­op­ment in the UK dur­ing the late eight­ies when the site agent came out from his of­fice, called in all the trades and told us that the site was be­ing moth­balled. My com­pany and oth­ers had over two years of work still to go. The rea­son for the shut­down? In­ter­est rates had been raised to 17 per cent ef­fec­tively killing the hous­ing mar­ket stone dead. We had to lay off 90 per cent of our work force just to sur­vive. I re­call that mort­gage rates peaked at 18.5 per cent. How many peo­ple could take that kind of hike now?

Cen­tral banks and or­ga­ni­za­tions are wor­ried about low rates. Low rates mean low re­turns for lenders, which may mean that lenders take more risk for bet­ter re­turns. Tak­ing risks with other peo­ple’s money. Look where that got us in the crash. Have the boys in the city learned over much? I’m lean­ing to­wards the no side.

There is an over­whelm­ing de­sire to raise rates to what might be re­garded as nor­mal. The trou­ble is that de­sire and eco­nomic con­di­tions for it to hap­pen, I think, dif­fer widely. That be­ing said, rates have crept up a tad even if it’s only at a quar­ter of a per cent at a time. I still think that a mo­tive be­hind that may be to give cen­tral bankers wrig­gle room to drop rates if and when the brown stuff hits the fan again. But I’m just a cynic. None­the­less, I don’t think any­one has fig­ured out how to re­solve the co­nun­drum of get­ting out of years of quan­ti­ta­tive eas­ing (QE). To us lesser mor­tals that’s print­ing money but QE sounds bet­ter.

Any­way, back­ground and di­gress­ing over. Canada’s bank­ing reg­u­la­tor the Of­fice of the Su­per­in­ten­dent of Fi­nan­cial In­sti­tu­tions (OSFI) has re­vealed new reg­u­la­tions for the mort­gage in­dus­try. This rule train has been on the tracks for a while in draft form but will come into force on Jan­uary 1, 2018.

In essence, unin­sured bor­row­ers, buy­ers that can put down a 20 per cent or greater de­posit, will have to un­dergo a stress test too. The stress test be­ing could the buyer af­ford the pay­ments on rates at the five-year posted av­er­age rate or two per cent higher than the rate cur­rently paid, which­ever is higher. Lenders will have to more vig­i­lant about loan-to-value ra­tios too.

This move could mean that buy­ers with an in­come of $100,000 per an­num that could cur­rently qual­ify for a prop­erty in the re­gion of $725,000 will be con­strained to around the $570,000 bracket, which could cool over­heated mar­kets in some places. Greater and lower in­comes brack­ets will ob­vi­ously be af­fected too.

Some pun­dits have ex­pressed con­cern that such a move could cool al­ready chilly hous­ing mar­kets in some places. I think it could too. Provin­cially reg­u­lated lenders do not fall un­der the aus­pices of OSFI so it wouldn’t be a sur­prise to see a mar­ket shift to­wards credit unions.

An­other thing that sticks out for me is that by cool­ing the hous­ing mar­ket in this way valu­a­tions may be lower thus tip­ping some loans out of ac­cept­able loan-to-value ra­tios. The whole thing be­com­ing a self-ful­fill­ing proph­esy if you will. Home own­ers could see their eq­ui­ties shrink or even dis­ap­pear. Change for the good there­fore, could un­in­ten­tion­ally, be­come change for the bad. Maybe a stress test on the ef­fects of chang­ing reg­u­la­tions is in or­der?

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