Last week the Minister of Finance, Jim Flaherty, announced another round of regulations on the mortgage industry. These are in addition to regulations he announced last year around this time http://abbatangelogroup.blogspot.com/2010_02_01_archive.html. I figured I’d give it a few days for the changes to sink in a bit before I shared my comments. It turns out that even after a few days I still can’t wrap my head around the changes...I’ll probably just use a few less curse words to describe my opinion.
For those of you who haven’t yet heard about the changes, here they are in a nutshell:
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
I could probably go on forever with my opinion on these changes but I’ll do my best not to. Changes one and three I don’t think carry a huge impact. The difference on the monthly payment for a $300,000 mortgage is about $100 when looking at a 30-year amortization compared to a 35-year amortization. If a borrower needs that extra $100 in order to qualify for the mortgage, maybe they shouldn’t be getting the mortgage anyways. The HELOC change remains to be seen what lenders will do with their products, if anything so my opinion on that is fairly neutral.
It’s the change to refinance maximums that I feel has the most negative impact. The changes last April lowered the refinance maximum from 95% LTV to 90% and now it’s being further lowered to 85%. I completely understand the Minister of Finance’s position on this...limit borrower’s ability to lower their equity position in their homes, creating a source of savings, rather than as he put it “an ATM machine”. However, I think what he overlooked is the greatest reason why people need to refinance their homes. He made reference to people removing the equity for their homes in order to buy boats and big-screen TVs. While that might be true in some cases, it definitely isn’t the norm in the cases I see. I’ve never had a client refinance their home in order to spend it on something other than home improvements or paying off other high-interest debt. Sure, that other high-interest debt may have been accumulated by purchasing boats and big-screen TVs but to me the issue isn’t what the client purchased, it was that a financial services company was more than willing to provide them with the credit facility to make the purchase in the first place and then carry the balance at a ridiculous rate. So once again the Minister announces changes to mortgage rules but does nothing about the practices of companies granting credit cards with ridiculous limits and unsecured Lines of Credit to anyone with a pulse. In my opinion, if he was to crack down on those predatory practices, there would be less need for people to refinance their homes. But hold on a second, who is it that the Minister looks to for guidance on these types of matters? Oh right, the CEOs of the big five Banks. I can’t imagine why they (the biggest issuers of credit cards and LOCs) would want to limit the ability of their Visa and Line of Credit customers paying 8-20% on their outstanding balances to refinance their mortgages paying less than 4%, especially when more and more of those mortgages are being refinanced with non-bank lenders (he said with a giant stench of sarcasm).
What this creates, in my opinion, is a market where people can obtain as many revolving credit lines as they want and have now been limited as to their options for relief from their debt. So, you can buy a house and leverage 95% of it but if you own a house and want to refinance it, you can only do so to 85%. Hmmm, so if I’m drowning in high-interest payments and don’t have enough equity in my house to dig myself out of it, I can probably sell my house to get the debt relief because the home I purchase can be leveraged 10% more. In the end, I end up worse off from an equity standpoint than I would have been if I had been able to refinance to 90%. Part of the reasoning behind the Minister’s changes was to further prevent our economy (which has shown NO signs of this happening) from having the same bursting housing bubble that the US had a few years ago. Except, once people start catching on that selling their homes could be the only way to get some debt relief, there will be a greater supply of homes on the market being sold by desperate sellers. That sounds to me like a recipe for falling house prices....do you hear that sound of a bursting bubble?
I’m not saying that the changes shouldn’t have been made, believe it or not. I’m saying that there are other ways the same desired outcome could have been achieved and it could have been in ways that would be more beneficial to the client. I’m also saying that the Government should be looking long and hard at all the elements that go into what they deem to be the problem and make more broad changes. It may also be a good idea to not have advisors who have a vested interest in one or more elements of the decision.
I know, I know, I said I would keep this short. However, this is short. I could go on about this for pages and pages! Let me know what you think and if you support the changes. I’d love to hear your opinion.