Tuesday, February 16, 2010

Popping the Bubble? Not really.

This morning, Ottawa announced new rules to tighten lending standards.  It's a start I guess...but as expected it isn't really a bold move by Ottawa, more a move so they can claim to save face when things tank.

Let's look at the rule changes:

1) Banks must now approve CMHC mortgages based on a 5 yr fixed rate, rather than a variable rate mortgage.  Indeed, many banks were already basing mortgage approvals based on debt service ratios for 5 year fixed rates, but this at least clarifies the requirements "across the board" for CMHC insurance qualification, as opposed to CMHC approving any 5% downpayment mortgage.  For many banks this will not impact their lending practices at all.

2) Maximum refinance amount lowered from 95% to 90%.  This is a symbolic move only.  It may send a message, but it still lets borrowers use their houses as ATMs, they just get back a bit less.

3) 20% downpayment required for CMHC backed mortgage insurance on investment properties.  This seems reasonable as a move to curb speculation.  Better yet, why provide CMHC insurance for 2nd properties at all?

The problem isn't speculation on 2nd properties, the problem is speculation on their primary residence.  60% of working Canadians have no pension plan, and 4 in 10 Canadians have no retirement savings whatsoever.  Yet homeownership is at record levels.  This results in the bulk of Canadians net worth being tied up in one asset: their home.

The new rules take effect April 19th.  Really, they do very little; it's more about the Feds attempting to save face.  When the bubble (which still doesn't exist) bursts the Feds can then choose to play it as "we warned you, and tried to prevent this".  They won't actually take credit for popping it, because then they'd be the bad guy...

I still stand by my previous post, Gutless.  This move is designed to appear that they are making tough choices...the reality is far from it.

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