Top 10 Effects Of The New Mortgage Rules
March 23, 2011
We may not go 10 for 10, but crystal ball-gazing is fun nonetheless.
In this humble of spirits, we present ten trends to watch out for in 2011, courtesy ofFlaherty & Co.’s new mortgage regime:
- Lower purchase and refinance demand will depress mortgage volumes, sparking greater rate competition as lenders battle for less business
- A small portion of home buyers will sprint to buy homes with a 35-year amortization before March 18, followed by downward pressure on home prices after March 18 as the amortization reduction removes market liquidity
- Negative personal consumption and wealth will result thanks to equity take-out restrictions, rising rates and softening home prices
- Unsecured debt usage will increase as homeowners are restricted from accessing as much of their equity, leading to even greater bank profits in unsecured lending
- Default rates will see no material improvement
- No significant improvement will occur in the number of risky borrowers, due to no change inTDS limits or Beacon score requirements
- HELOC rate discounts will be less frequent as some non-bank offerings disappear and HELOC funding costs inch higher
- Banks will pick up mortgage market share
- More private lenders will offer high-interest uninsured 2nd mortgages to 90% LTV
- If amortization restrictions accelerate falling home prices, we’ll see somewhat greater default risk and more negative equity situations among low-equity homeowners
The Reason Bank CEOs are Superheroes (to their shareholders):
In one epic and brilliantly calculated move, bank CEOs like TD’s Ed Clarke and BMO’s Bill Downe convinced Canadians they had consumers’ interests at heart, and convinced the Finance Department to:
- Overlook credit card debt, a market that’s yielded double-digit growth for banks and funded $260 billion of purchases last year
- Ignore the risk of unsecured lines of credit (ULOCs) so banks can continue offering them to their customers when 85% LTV refinances aren’t enough [Brokers don’t generally sell ULOCs.]
- Quash broker’s primary source of growth (first-time buyers) with amortization restrictions
- Cut off consumers’ ability to refinance profitable high-interest consumer debt into low-interest mortgage debt
- Eliminate HELOC competition from non-deposit-taking lenders which rely on securitization (HELOCs have been massive money-makers for banks, with 170% growth over the last decade. HELOCs now account for 12% of household debt. Banks like TD, BMO, and RBC are largely unaffected by the new HELOC rules because they don’t depend on securitization. )
- Increase HELOC funding costs at banks with broker channels (like Scotiabank and National Bank—both of which securitize some of their readvanceable products, according to sources)
- Brush aside the consultative recommendations ofCAAMP aimed at permitting well-qualified borrowers to retain mortgage flexibility in exchange for tighter borrower qualification standards
- Make it harder for more people with collateral charge mortgages to change lenders (Thanks to the lower 85% LTV refi maximum. Bravo to TD’s Ed Clarke on this one.)
In short, the big bank CEOs orchestrated a virtuoso performance for their shareholders, at the expense of sensible mortgage holders. It’s moves like this that justify every crumb of their $5 to $15 million+compensation packages.