A Pause for Clarity

I thought it would be prudent to write my most recent blog about something that has reared its head several times of late.


As a Mortgage Broker who focuses a large portion of my business on first time and young homeowners I am often presented with some unique scenarios.

The most common concern that I have found from the underwriting side is when a parent is the guarantor on the mortgage. Many young people may be at a stage in their career where they can carry a mortgage and everything that goes along with it, however they narrowly miss qualifying for one for a variety of reasons. In these situations, parents will appear on the mortgage as a guarantor.


Unlike other types of loans like car loans for example, where the co-signor simply is on the loan as a security measure, with a mortgage the guarantor must be fully qualified along with the primary applicant.

Therefore, although the guarantor may not be involved in the process of finding a house or finding a mortgage when it comes time to verify their finances they will have to provide as much - and if they are the source of the down payment - more information than the primary applicant.

The comment I most often hear is, " I have never had to provide this information before."

That may very well be the case if you haven't obtained a high-ratio mortgage in the past year, however if you are interested in enterting the Canadian housing market NOW and don't have 20% to put down, then be prepared until a drastic change in the Canadian psyche appears, to go along with it.

When the housing market in the United States crashed in 2008 and consequently their entire economy toppled over, many looked at the mismanagement in the housing sector as a major cause.


The American mortgage market is much different than ours north of the border. Americans are able to deduct the tax from their mortgages and many use a huge mortgage as a tax planning strategy. There have been noted cases that have depicted transplanted Canadians with their inherently conservative Canadian financial mindset who bought homes within their price range and survived the meltdown in the US. Conversely, there have also been as many stories about Americans who like in 3000 sq ft homes who couldn’t afford to heat them.


I digress.


The Canadian financial system has always been relatively, if not substantially more conservative than those in many other countries. This is clearly evident when it comes to the mortgage market.

I have on several occasions met CMHC employees or contractors who have been hired by foreign governments to go teach their bankers how to implement the Canadian mortgage system into their markets.


This brings us to CMHC, the Canada Mortgage and Housing Corporation. CMHC is a Crown Corporation that among other things ensures Canadian mortgages that have less than a 20% down payment.

On July 9, 2008 the Department of Finance released a press release entitled “GOVERNMENT OF CANADA MOVES TO PROTECT, STRENGTHEN CANADIAN HOUSING MARKET”

Link

Even though the market was always strong in Canada – mortgage defaults in Canada are still only around .40% - with trouble on the horizon in the American market CMHC decided to bolster their mortgage requirements.

The new measures they announced included:
- Fixing the maximum amortization period for new government-backed mortgages to 35
years;
- Requiring a minimum down payment of five per cent for new government-backed
mortgages;
- Establishing a consistent minimum credit score requirement; and
- Introducing new loan documentation standards.

The issue that I am writing about in this blog is the last point; introducing new loan documentation standards.


If you are paying less than 20% down on a property, the Government is going to ask you for documentation to be fully satisfied that the mortgage they are guaranteeing is up to their standards, which as we now know is one of if not the highest in the World.

The days where you could walk into a bank and say, “here is $5000 in cash, I want to buy this house!” are long gone. These minimum documentation requirements mean that no matter how much money you have or how long you have been a homeowner for, if you are applying for a NEW government insured mortgage you will be required to undergo the government’s scrutiny.

These measures should not be misconstrued as something that the lender themselves are forcing you to do. It is a Canadian Government mandate to ensure the validity and strength of the mortgage holders and in order to have the mortgage ensured by the government the lenders must play ball.


Some people, understandably, may still disagree with asking for banking records and employment details, but the flip side as we have seen, is a housing market that freely lent money and consequently went belly up and will take many years to fully recover.

So next time your Bank asks you for what you may feel is too much information, keep in mind you could always be the American who has the McMansion but can’t afford to heat it.